Transparency in Revenue Estimating

About the Author

Revenue estimates state
the changes in expected revenues associated with changes in the tax
law. Thirty years ago, they were an afterthought in the process of
formulating tax policy. Today, due to a series of laws designed to
contain federal spend­ing,[1] revenue estimates occupy
center stage-the numbers can make or break otherwise worthy tax
initiatives.

Meanwhile, there have
been some very signifi­cant improvements in revenue-estimating
tech­niques.[2] As a result, revenue estimators are better
positioned today to produce both dynamic scores that take economic
feedback effects into account and improved distributional estimates
that show the impact of tax changes by income class. Other changes
include the use of linked spreadsheets, more powerful computers,
and multi-year tax models using longitudinal data.

Despite these
developments, the revenue-esti­mating process is nearly as much
a mystery today as it was when estimates were much less important
policy desiderata. Now and then, a ray of sunshine gets thrown on
the estimating pro­cess, but in general, it remains shrouded in
secrecy.

This paper examines the
pros and cons of this ongoing secrecy and concludes that it is time
to consider some modest changes that, on balance, will make the
estimating process more transpar­ent. Enhanced transparency, in
turn, should make it possible to begin addressing other
reve­nue-estimating issues that demand attention.[3]

Transparency
Differences Between Agencies

The staffs of three
federal agencies prepare revenue estimates on a regular basis. They
are, specifically:

The OTA
Staff.
The Revenue Estimating Staff in the Office of Tax Analysis (OTA) in
the U.S. Department of the Treasury[4] has about 13 financial
economists who are supported by a separate eight-person modeling
and com­puter applications staff.[5] In addition, OTA's
individual, business, and international staffs assist with revenue
estimates in their areas of expertise.

The JCT
Staff.The revenue-estimating
staff of the congressional Joint Committee on Taxation (JCT)[6] has
about 16 economists and senior economists, as well as five
supporting statisti­cal and computer specialists.[7]

The CBO
Staff.The Budget Analysis
Division in the Congressional Budget Office (CBO) has approximately
45 analysts in four operating units who prepare spending
projections and cost estimates for legislation. In addition, the
CBO's Tax Analysis Division has about 11 tax analysts, as well as
managers and supporting staff, who estimate future tax receipts and
pre­pare studies of the U.S. tax structure.[8]

Although there are
three revenue-estimating staffs, only two estimates are typically
prepared with respect to a given tax proposal: one by Trea­sury
and the other by either the Joint Committee or the Congressional
Budget Office. As explained in more detail later in this paper,
revenue estimates from the Joint Committee relate to individual and
corporate income taxes, Social Security and Medi­care taxes,
estate and gift taxes, and excise taxes. Budget Office revenue
estimates relate to tariffs, offsets, and user charges.

OTA and JCT (or CBO)
revenue estimates become important at different stages of the
legislative pro­cess. Treasury estimates matter when the
President's budget is being prepared or when a tax proposal is
being readied by Treasury for submission to Con­gress. Later,
during the consideration of a tax bill, Joint Committee estimates
become critical, espe­cially if the tax-writing committees are
required to hit congressionally mandated budget targets. Still
later, if Treasury recommends a veto, Treasury esti­mates will
be used to advise the President.

With respect to
estimating transparency, there are some important differences
between OTA, the JCT, and the CBO. Of the three, the Congressional
Budget Office is the most willing to make informa­tion public
regarding its revenue-estimating meth­odology. The reasons for
this are discussed later in this paper.

In contrast, the OTA
staff at Treasury is very secretive. As one former senior economist
in the current Bush Administration observed of the Trea­sury
staff, "They are discouragingly non-transpar­ent even to folks
within Treasury."

Similar comments abound
on Capitol Hill with respect to the JCT estimating staff. However,
the JCT staff has been consistently more open than Treasury in some
significant ways, which will be described below.

What Does Transparency
Mean?

This paper focuses
primarily on the technical process of preparing revenue estimates
by assem­bling data and making assumptions and
calcula­tions at the staff level. It focuses only secondarily
on the process by which staff estimates are reviewed and sometimes
changed by senior staff and political officials.

Transparency in the
technical revenue-estimat­ing process at the staff level means
different things to different people. Depending on how
transpar­ency is defined, individuals can easily find
them­selves on opposite sides of the debate over whether
greater transparency is a good idea.

The following are some
of the possible compo­nents of the transparency concept as
applied to the revenue estimates prepared by federal
agencies:

Generalized
Transparency

Publishing written
explanations describing how, in general, an agency prepares revenue
estimates. Variations on this theme include publishing focused
explanations relating to specific topics such as capital gains
estimating methodology.

Sponsorship of
occasional conferences or sem­inars at which revenue estimators
describe their work, provide illustrations, and solicit comments
from peers.

Publication of source
data-such as the Inter­nal Revenue Service's Statistics of
Income[9] or the IRS tax return "public-use
file"-that can be used by private organizations to make their own
revenue estimates.

Publication of
retrospective analyses of the accuracy of prior revenue estimates
in the lim­ited instances[10] in which this is
possible.

Specific
Transparency

Preparation and release
of written explanations describing how a specific revenue estimate
was done.

Release of the
assumptions that were made by an estimator when doing a specific
revenue estimate, including the behavioral assumptions (i.e.,
expected changes in taxpayer behavior consequent on a change in
taxation).

Listing the sources of
data that were used in making a specific revenue estimate,
including any links to publicly available data.

Description of the
spreadsheets or simulation models used in doing a specific
estimate, including any use of specialized software.

Release of the
spreadsheet or computer simula­tion model output files
underlying a specific revenue estimate, preferably in electronic
form, and any off-model adjustments made to the output
files.

Release of the
non-privileged elements of the simulation models
themselves.

Release of the actual
data used in making a specific revenue estimate to the extent that
this can be done without jeopardizing taxpayer pri­vacy or
business confidentiality.

Which of these
components we include in our definition of transparency depends on
our goals. If the goal is to permit "accuracy checking" through
full replication and validation of a spe­cific revenue
estimate, our definition of transpar­ency should include all 11
of these general and specific components. If, in contrast, the goal
is to acquire a general understanding of how revenue estimates are
done, the components listed under "Generalized Transparency" are
sufficient.

The goals of most
requests for revenue-esti­mating transparency fall between
these two extremes. For some individuals, it is sufficient to know
how estimates are prepared and to be assured that the estimates are
honest and reliable. For them, generalized transparency is usually
adequate. But for scholars, researchers, and tax professionals,
more than generalized disclosure is needed, and at least some of
the components of "Specific Transparency" should be made available
to these individuals.

Sources of Transparency
Guidance

Revenue estimates are
related more or less directly to several other types of government
fore­casts. While each type of forecast can be
distin­guished from the others, transparency practices
developed with respect to one type are often instructive when
determining the degree of trans­parency that is appropriate for
other types. Accordingly, this paper takes into account the
transparency practices that apply to all of the fol­lowing
forecasts:

Baseline Receipts
Estimates.Baseline receipts
estimates indicate the expected reve­nues under current law for
a specified time period, such as five or 10 years.

Distributional
Estimates.Distributional
esti­mates, such as those prepared by the Treasury and Joint
Committee revenue-estimating staffs, indicate the financial impact,
by income class, of changes in the tax laws.[11]

Cost
Estimates.Cost estimates, such as
those prepared by the Congressional Budget Office and Office of
Management and Budget, project the fiscal effects of spending
bills.

Revenue
Estimates.Revenue estimates (the
subject of this paper) are forecasts indicating the expected change
in tax payments resulting from a change in the tax
law.

One must be cautious,
however, when applying transparency practices developed in one of
these forecasting areas to other types of forecasts or
esti­mates. Baseline estimates, for example, are few in number
and attract considerable public interest. In contrast, thousands of
cost and revenue estimates are prepared each year, and the public
is generally interested in only a few of them. This makes it
important to think in cost-benefit terms about the amount of detail
to be provided when making cost or revenue estimates public.
In-depth documenta­tion is appropriate for baseline estimates,
but run-of-the-mill revenue estimates ordinarily demand only brief
explanations.

Nevertheless, if one
keeps this caveat in mind, there are useful lessons to be learned
for the reve­nue-estimating process from studying
transpar­ency practices in all the areas listed
above.

The Transparency
Situation Today

No matter how
transparency is defined, reliable, official information about the
U.S. Treasury reve­nue-estimating process is insufficient to
provide even a rudimentary understanding of that
process.

In contrast, since
1990, the Joint Committee on Taxation has published a series of
documents describing its revenue-estimating procedures, has held
several revenue-estimating conferences open to private-sector
invitees, and has established an advisory panel of private
revenue-estimating experts. In almost all cases, however, the
technical foundations for specific Joint Committee estimates remain
shrouded in secrecy.

Meanwhile, thanks to a
congressional disclosure mandate,[12] Congressional Budget
Office estima­tors are relatively open regarding the basis for
their baseline and cost estimates, and the staff in general has an
accepting attitude toward public disclosure. But, although it is
clearly better than the JCT or Treasury when it comes to
transparency, profes­sional observers state that the CBO is
definitely not laying out all the details that underlie its
forecasts.

The Treasury
Staff

Treasury has published
almost nothing that offi­cially describes its
revenue-estimating procedures. However, Treasury economists
familiar with reve­nue-estimating issues have created a fairly
signifi­cant body of unofficial, scholarly revenue-estimating
research over the years, some of it writ­ten after the authors
had left Treasury for other employment.[13]

About 15 years ago, the
Treasury revenue-esti­mating staff compiled an internal
document known as the "Revenue Estimating Handbook," a loose-leaf
compilation of documents that was designed to introduce newly hired
employees to their work.[14] This handbook was never published or
released to the public. Nor has it been updated.

As a result, the
estimating staff today uses a 13-year-old article from Tax
Notes magazine as an introduction to the revenue-estimating
process for newly hired staff. The article, entitled "The
Reve­nue Estimating Process" was authored by Emil M. Sunley, a
former Deputy Assistant Secretary for Tax Policy at Treasury, and
Randall D. Weiss, a former Deputy Chief of Staff of the Joint
Committee on Taxation.[15] By the time their article was written,
both had entered the private sector.

Although Treasury has
not published an official description of its revenue-estimating
process, it has released an excerpt from its internal
revenue-estimating "briefing book"[16] in response to a 1990
Freedom of Information Act request from Tax Ana­lysts, a
nonprofit publisher. The Treasury briefing book discusses such
topics as the use of revenue estimates, deadlines, general
estimating methodol­ogy, the data and models used in revenue
esti­mates, the conventions employed, and relations with
outside estimators including the Joint Com­mittee on Taxation
and "Lobbyists/Accounting Firms."

The briefing book
discussion also sets forth[17] Treasury's rationale for limiting the
amount of reve­nue-estimating information that is released to
the public. The following is quoted from that
discussion:

"Estimates are often
made on short notice and a great deal of experience and judgment is
required."

"Estimates frequently
involve novel ideas where there is little or no data, no previous
experience to draw upon, no studies to refer to, indeed nothing
available but the estimator's past experience. Making this public
will not result in better estimates and will hamper efforts to take
advantage internally of the esti­mator's input."

"Public release of
detail allows interested parties to criticize those elements of the
estimate favor­able [sic] to them and conveniently
overlook issues on the other side. Only biased criticism results
and the estimate is not improved."

Although Treasury has
not produced any pub­lished, official description of its
revenue-estimat­ing processes and is reluctant to release
information about that process, two OTA Papers have touched
on aspects of the subject in recent years.[18] The first, "U.S.
Treasury Distributional Analysis Methodology" (OTA Paper
85), appeared in September 1999, shortly before Treasury reduced
distributional analyses to "insignificant levels."[19] The second,
"Defining and Measuring Marriage Penalties and Bonuses" (OTA
Paper 82- Revised), appeared in November 1999 and it
pro­vides insights into Treasury's estimating techniques
relating to the consequences of filing tax returns as a couple
rather than as individuals.

An earlier
staff-originated resource is the "Com­pendium of OTA Papers,"
edited by OTA members Don Fullerton and Thomas S. Neubig and
written after enactment of the Tax Reform Act of 1986.[20]
That compendium sought, among other things, to make the Treasury
revenue-estimating process more transparent. It included numerous
articles explaining how Treasury prepared the revenue and
distributional analyses required in connection with the 1986
Act.

A potentially
significant Treasury revenue-esti­mating paper authored by John
McClelland, a Financial Economist on the Treasury's Revenue
Estimating Staff, was scheduled for presentation in the fall of
2003 at the annual meeting of the National Tax Association (NTA)
under the work­ing title "Corporate Integration: Description of
Revenue Estimating Methodology." However, for reasons that are not
clear, it was not presented. If the paper had appeared, it would
have described the issues involved in estimating the revenue loss
attributable to the President's January 2003 divi­dend
exclusion proposal. According to Treasury, the paper may appear at
an unspecified later date as an OTA Paper.

As an executive branch
agency, the Treasury Department is subject to the disclosure
provisions of the Freedom of Information Act (FOIA). How­ever,
with one exception, Treasury has not been required under the FOIA
to release any informa­tion regarding specific revenue
estimates.

That exception relates
to a case brought by the American Society of Pension Actuaries in
1990. In that case, the Society sought release of the
Trea­sury's "assumptions and calculations" underlying an
estimate that a shift in pension-related enforce­ment practices
would generate $666 million in new revenue. The U.S. District Court
for the Dis­trict of Columbia ordered release of the relevant
documents because:

the estimate they
produced became part of the President's Budget. By estimating that
the IRS could generate $666 million in revenue by shifting its
enforcement practices, the government adopted as its official
policy the calculations and assumptions underlying this
estimate…. Because [those] documents…contain analytic
backup for the government estimate, they "embody the agency's
effective law and policy" and therefore are not protected [from
disclosure]….[21]

The government did not
appeal the Pension Actu­aries decision, but that hardly
constitutes acquies­cence in its result. Currently, the
Treasury is resisting-or at least delaying action on-a Free­dom
of Information Act request[22] filed by Tax Ana­lysts for documents
underlying the Treasury's $364 billion cost estimate relating to
the President's Janu­ary 2003 dividend exclusion proposal.[23]

Oversight of the
Treasury revenue-estimating pro­cess is the responsibility of
the managers who direct the Office of Tax Analysis in the Office of
the Deputy Assistant Secretary for Tax Policy (Tax Analysis). They
have the professional skills needed to keep tabs on the
revenue-estimating staff, which is one of five under their
direction,[24] and they provide expect­able, routine
guidance. Individual revenue estimates are reviewed by these
managers, as are other papers and memorandums generated by the OTA
staff.

In the past 15 years,
there have been two exter­nal reviews of the Treasury
revenue-estimating process by other executive branch agencies. Alan
Greenspan of the Federal Reserve Board con­ducted the first
around 1990. The second, in 2001, was undertaken by the President's
Council of Economic Advisers and apparently resulted from concern
by then-Council member Laurence Lindsey that Treasury might be
underestimating the beneficial effects of tax cuts. Neither of
these estimating reviews was ever publicly announced, nor have the
results been published.

With these two
exceptions, there is no evidence that the estimating staff has been
subjected at any point within the past generation to an in-depth,
internal examination of its procedures, techniques, and estimating
consistency (as contrasted with routine supervision).

Public oversight of the
Treasury's revenue-esti­mating process is not currently
possible as a sup­plement to any official, internal oversight
that may occur. As outlined earlier, Treasury provides almost no
official information about how it does revenue estimates, and none
at all about the basis for particular estimates. Given that fact,
effective monitoring by outsiders is currently impossible. For this
reason, interested members of the public are unable to perform
"trust-but-verify" reviews of the Treasury revenue-estimating
process.

The Joint
Committee Staff

The Joint Committee on
Taxation has been engaged in some form of revenue estimating almost
since its inception in 1926. When the 1974 Budget Act became law, a
decision was made to enhance the JCT's revenue-estimating
capability. Treasury's individual income tax estimating model was
made available to the JCT soon thereafter. Fol­lowing the
hiring of two former Treasury revenue estimators, the JCT gained
access to Treasury's cor­porate income tax model as well.[25]

The JCT
revenue-estimating process operated completely out of the public
eye until the late 1980s, at which point the Joint Committee on
Taxation began to publish a series of documents describing its
revenue-estimating processes, thus providing a welcome amount of
generalized transparency.

The Capital Gains
Confrontation.The first of these
documents appeared in March 1989.[26] In it, Joint Committee
Chief of Staff Ronald A. Pearlman briefly discussed why the
revenue-estimating staffs at Treasury and the Joint Committee had
produced widely divergent revenue estimates relating to a proposal
by the Administration of President George H. W. Bush to reduce
capital gains tax rates.

On March 6, 1990, the
Senate Finance Commit­tee held a hearing[27] to investigate
the reasons for these differences in the Treasury and Joint
Com­mittee estimates regarding the Administration's gains tax
proposals. Treasury had estimated that, by spurring gains
realizations, the Administration proposal would increase federal
tax receipts by $12.5 billion for the fiscal years 1990-1995.
Meanwhile, the Joint Committee estimated that the proposal would
reduce federal revenues by $11.4 billion in the same time
frame.

The hearing revealed a
number of unresolved disparities in the estimating assumptions made
by the two staffs. It also made clear that the principal reason for
the $23.9 billion disparity in the esti­mates lay in relatively
small differences in the underlying behavioral assumptions used by
the Treasury and Joint Committee staffs.

In conjunction with the
Senate Finance Com­mittee's March 1990 hearing, the Joint
Committee published its Explanation of Methodology Used to
Estimate Proposals Affecting the Taxation of Income from Capital
Gains.[28] That report described the
revenue-estimating process in general terms and provided specific
detail with respect to the Joint Committee's approach to gains
estimates. It then analyzed the differences between the Joint
Com­mittee and Treasury approaches to the capital gains issue,
including the differing assumptions about the likely behavioral
responses to a cut in gains rates.

Treasury was also
active in publishing materials relating to capital gains
revenue-estimating issues. Starting in May 1989, it released a
series of OTA Papers detailing several different
methodological and data approaches to estimating the effects of
gains tax changes.[29]

No one can read the
JCT's 1989 and 1990 docu­ments on the gains tax estimation
issue and the Treasury's 1989 OTA papers and March 6, 1990, Senate
Finance testimony on the same subject[30] without acquiring a better
understanding of both the revenue-estimating process in general and
the importance of assumed behavioral responses in that
process.

The 1989-1990 gains tax
confrontation was "destructive," in the view of one Joint Committee
observer, because it created considerable acrimony between the
Treasury and Joint Committee reve­nue-estimating staffs, which
theretofore had gener­ally worked cooperatively on estimating
chores. At the same time, however, it demonstrated the abil­ity
of full disclosure to dispel suspicion and dis­trust resulting
from conflicting revenue estimates.

Descriptions of
Methodology.Two other Joint
Committee revenue-estimating reports also appeared in the early
1990s. Discussion of Revenue Estimating Methodology and
Process, published in 1992, provided a definitive general
overview of the procedures used by the JCT when making revenue
estimates, including distributional analyses.[31] Part II provided
answers to common questions asked by Members of Congress, who are
the principal consumers of JCT estimates. Those questions and
answers cover a wide variety of issues. The Q&A functions, in
effect, as an estimating procedures manual for the JCT.

The following year, the
Joint Committee pro­duced a document dealing with
distributional analysis and methodology.[32] It has become known as
"the Red Book." Although thoughtfully written, only a single
distributional table was prepared using its methodology.[33]
Thereafter, the proposed methodology was not used again because the
JCT estimating staff failed to reach an ongoing consen­sus
about how to implement it.[34]

A more recent
description of the JCT's overall estimating methodology is set
forth in May 2002 testimony before the House Ways and Means
Over­sight Subcommittee by Lindy Paull,[35] who was then
Chief of Staff of the Joint Committee. This tes­timony provides
a brief but useful JCT revenue-estimating overview and history, and
includes an "Attachment" that lists 15 Joint Committee
"Reve­nue Estimating Methodological Publications" that appeared
between 1990 and 2001. However, the main focus of the Paull
testimony is on the feasibil­ity of incorporating the
macroeconomic effects of tax law changes into JCT revenue
estimates. That topic is discussed in the next section.

Dynamic
Scoring.Since the appearance of
the Red Book more than 10 years ago, most of the
rev­enue-estimating information released by the Joint Committee
on Taxation has focused on the issue of "dynamic scoring," which is
the phrase used to describe the incorporation of macroeconomic
effects into the assumptions underlying revenue
estimates.

The principal
macroeconomic aggregates that relate to dynamic scoring are gross
domestic prod­uct, aggregate investment, interest rates, the
over­all price index, and the total level of state and local
taxes.[36] In ordinary revenue estimates, these
"baseline aggregates," which are supplied to the JCT by the CBO,
are assumed to remain unchanged by proposed tax law changes. Hence,
any "feedback effects" on revenue attributable to changes in these
aggregates are excluded from the revenue estimate. For that reason,
these estimates are sometimes called "standard" or "static"
esti­mates. In contrast, a dynamic revenue estimate relating to
a tax proposal includes both the pro­posal's initial revenue
effects and the feedback effects on revenue attributable to the
likely changes in the baseline economic aggregates due to enactment
of the proposal.[37]

Dynamic scoring
involves more than merely considering the behavioral effects of tax
changes. Revenue estimators at Treasury and the JCT have always
taken behavioral effects into account[38] in revenue estimates
whenever they had some basis for predicting those effects. As a
former JCT chief of staff recently pointed out, the JCT has never
prepared truly "static" revenue estimates that dis­regarded
behavioral effects. Instead, he states, the JCT now prepares both
"standard" estimates (which take behavioral effects into account
when­ever possible) and "dynamic" scores (which take both
behavioral effects and macroeconomic feed­back effects into
account).

Use of dynamic scoring
has been urged by sup­ply-side proponents of cuts in tax rates,
who wish to take into account the beneficial effects of tax cuts on
subsequent economic activity and thus on tax revenues.[39]
Static or standard scoring, in their view, overstates the likely
revenue losses attribut­able to tax cut proposals by omitting
subsequently generated revenue attributable to the additional
economic activity induced by the tax cut. Those who view dynamic
scoring less enthusiastically point to the uncertainties associated
with properly modeling feedback effects.[40]

The year 1995 was a
watershed in the Joint Committee's approach to dynamic scoring. The
year began with an unusual joint hearing con­ducted on January
10 by the House and Senate Budget Committees.[41] The purpose of
the hearing, in the words of House Budget Committee Chair­man
John R. Kasich (R-OH), was "to consider the role that static versus
dynamic scoring plays in promoting or hindering accurate assessment
of the costs and benefits of policy options before the Congress."[42]
The hearing was inspired by Republi­can demands that dynamic
scoring techniques be applied to evaluate the likely economic
effects of the "Contract With America" that formed the Republican
legislative agenda for the first 100 days of the 104th
Congress.

The hearing featured a
distinguished panel of witnesses from the private sector[43] in
addition to representatives of the JCT and CBO.[44] The
wit­nesses, whose views spanned the political spec­trum,
generally agreed that, in theory, revenue estimates would be more
accurate if they included the feedback effects of tax changes on
the basic macroeconomic aggregates. Except for Dr. Martin Feldstein
of Harvard, they also agreed that there were serious practical and
theoretical hurdles to overcome before macroeconomic feedback
effects could be included in revenue estimates.[45]

The Senate Finance
Committee held a hearing on January 24, 1995, that produced similar
con­clusions regarding the feasibility of using dynamic
revenue-estimating techniques. As a result, Finance Committee
Chairman Bob Packwood (R- OR), announced on January 24, 1995, that
reve­nue estimates would remain "static" for the time being.
Packwood said the message he had received from witnesses was "be
careful, don't go wild."[46]

Subsequent to these
hearings, the JCT continued to work on the dynamic scoring issue.
These efforts came to fruition on May 8, 2003, when a floor
state­ment by House Ways and Means Committee Chair­man
William M. Thomas (R-CA) made public a detailed description by the
Joint Committee of the steps it had taken to provide a dynamic
estimate of the revenue costs of H.R. 2, which contained
Presi­dent George W. Bush's 2003 tax cut proposals.[47]
This was the Joint Committee's first full-blown dynamic analysis.
Its release came in response to the January 7, 2003, adoption of
House Rule XIII.3.(h)(2),[48] which required a "macroeconomic impact"
analysis of major tax legislation.

That Joint Committee
floor-statement explana­tion discussed the three economic
models used in preparing the JCT's dynamic estimate, described the
estimators' assumptions regarding federal fis­cal and monetary
policy, outlined the behavioral response assumptions made by the
estimators, and set forth the estimators' simulation results
including the probable changes in economic growth, labor supply,
and employment. It also described the likely budgetary effects of
the pro­posals under review and listed the data sources used by
the estimators.

Subsequently, on
December 22, 2003, the Joint Committee published an expanded
version of its May 2003 analysis of the macroeconomic effects of
H.R. 2.[49] The December report also contained a
history and description of the Joint Committee's macroeconomic
modeling work and a description of the dynamic scoring activities
of its "Blue Rib­bon Advisory Panel."

Transparency
Efforts.The JCT squarely
addressed the issue of revenue-estimating trans­parency in a
May 18, 1995, press release,[50] in which the committee
announced that it was taking steps to "open up the estimating
process so that the public has a better understanding of the
assumptions and procedures used…." The press release also
said that the Joint Committee would establish an advisory board "to
improve the esti­mating process and estimating methodology."
The release added that the JCT would begin to include "information
about the behavioral assumptions" in its estimates, provide a
"description of significant potential macroeconomic effects" of tax
proposals, and make public "aspects of its primary
[estimat­ing] models which do not include confidential
tax­payer information."

The Joint Committee's
May 18 press release was accompanied by two substantially identical
letters, also dated May 18, from Kenneth J. Kies, Chief of Staff of
the JCT, to Bill Archer, House Ways and Means Committee Chairman,
and Bob Packwood, Senate Finance Committee Chairman.[51] In
addi­tion to the changes outlined in the press release, those
letters stated that the JCT would begin to meet with "reputable
outside economists" to dis­cuss the feasibility of actually
"incorporating mac­roeconomic effects into our estimates" as
contrasted with simply describing them. The let­ters also
pledged to monitor the accuracy of the estimating process "by
selecting several estimates to study over a period of years
following enact­ment" and to institute a new inventory system
"so that we can more efficiently process and monitor the progress
of pending estimate requests."

At the same time,
however, the two May 18 let­ters cut back on some of the broad
language in the JCT press release. For example, the letters
indi­cated that most of the information listed in the JCT
release would be prepared only if "requested by the Member of
Congress submitting the revenue esti­mate request" and thus
would not be available to the public unless the Member decided to
release it.

Later in 1995, Joint
Committee Chief of Staff Kies authored a "Viewpoint" article in
Tax Notes maga­zine,[52] in which he declared
flatly that "the public knows too little about how the Joint
Committee on Taxation prepares revenue estimates." He went on to
outline the initiatives then underway to begin "letting in the
light on the estimating process while at the same time deflating
the wrong and misleading statements about the estimating
process."

The 1995 Joint
Committee initiatives mark the high-water point for JCT efforts to
"open up" the estimating process. Nearly 10 years later, it is not
clear how much those initiatives accomplished to promote
transparency.

For example, it does
not appear that the JCT has initiated a project "to monitor the
accuracy" of its estimating process by "selecting several
estimates" for retrospective analysis subsequent to enact­ment.
If it has done monitoring of that sort, the results have not been
made public.

The status of several
of the other initiatives is also murky. In particular, it is not
clear whether Members of Congress regularly request and receive
information about modeling techniques or macro­economic
effects. However, in a few instances, according to former JCT
officials, Members of Con­gress have asked about-and been
briefed on-the behavioral assumptions underlying
estimates.

In addition, former JCT
officials also confirm that the Joint Committee has now and then
made public the basic elements of its estimating models, mainly in
response to requests from major accounting firms.

Unlike Treasury, the
Joint Committee is not required to disclose documents under the
Free­dom of Information Act, but it is subject to a
dif­ferent-and perhaps more effective-disclosure regime because
it has "535 Congressional bosses" who can request both revenue
estimates and sup­plementary information about how they were
done. In addition, by working through a sympa­thetic Member of
Congress, the lobbying commu­nity can obtain detailed
information about Joint Committee revenue estimates. This type of
disclo­sure is sometimes called "selective
transparency."

However, the existing
Joint Committee restric­tions on disclosure of information
relating to reve­nue estimates do have an impact on the general
public, including students, academic researchers, and the press.
Their access to specific revenue-esti­mating information
depends to a large degree on how well-connected they are on Capitol
Hill. Under existing selective transparency arrange­ments, if
individuals lack political connections, they lack access.[53]
Thus, outside review of the JCT revenue-estimating
process-especially scholarly review-is frequently
thwarted.

Advisory
Boards.The advisory board
announced in the Joint Committee's May 18, 1995, press release
became known as the "Blue Ribbon Advisory Panel." It was composed
of pri­vate-sector economists from both political parties and
various political persuasions. Its status is murky, and it is not
clear what work it has actually done. It appears that the panel has
been largely inactive, except for three meetings in 2002 to
con­sider dynamic scoring issues.

The Blue Ribbon Panel
superseded an earlier Revenue Estimating Advisory Board, formed on
April 18, 1989, at the request of Ways and Means Committee Chairman
Dan Rostenkowski (D-IL), to consult with the Joint Committee
revenue-esti­mating staff on econometric models, estimating
methodology, and current academic research.[54]

From its inception, the
Blue Ribbon Panel's principal focus has been to assist the Joint
Com­mittee in moving toward use of dynamic analysis. However,
until 2002, the panel was not regularly called upon for advice. In
that year, in response to a request from Ways and Means Committee
Chair­man William Thomas, the panel met three times to review
the Joint Committee's dynamic scoring capability.

The original
announcement of formation of the Blue Ribbon Panel envisioned use
of the panel to review all aspects of the Joint Committee's
revenue-estimating work, but this review has not occurred. Nor has
the panel met since it finished its series of three 2002 meetings
on dynamic scoring.

Opinions differ about
the Blue Ribbon Panel's usefulness. A recent Joint Committee
description of the panel's activities paints a favorable picture,[55]
but a private-sector observer who is a member of the panel states
that its work has been "directed entirely" to the issue of dynamic
scoring and that, while it has been "useful and influential" with
respect to that subject, it has "not taken up" any other topics.
Another knowledgeable private-sector revenue estimator describes
the panel as a semi-moribund body whose chief function seems to be
to provide the JCT with a response when the commit­tee is
challenged on the need for enhanced public oversight over the
revenue-estimating process.

In 1996, the Joint
Committee also convened a group of macroeconomic modelers who had
expe­rience in forecasting the economic effects of major tax
initiatives. This "macro group" was separate from the Blue Ribbon
panel discussed above. The modeling group worked with the Joint
Committee staff to ascertain why different forecasting or
simu­lation models produced varying results. The results of
this effort were made public in a sympo­sium held in January
1997.[56] The Joint Commit­tee then set to work
to develop a macroeconomic equilibrium growth model (MEG). The MEG,
along with other models, can be used to produce a dynamic analysis
of tax proposals and to estimate the effects of specific tax
proposals on different groups of taxpayers.

The JCT and
Congress.Relations between
Members of Congress and the JCT are a problem­atic element in
the revenue-estimating transpar­ency picture. Congress, acting
through the Joint Committee on Taxation, is in full charge of the
JCT revenue estimators. Congress is the revenue esti­mators'
employer and the party that has authority to oversee the estimating
process, alter the rules, and implement changes.

Hence, if the Joint
Committee is secretive about its revenue estimates, that fact
reflects the will of Congress. Congress, acting through the JCT
Chief of Staff, currently requires the revenue estimators to
maintain confidentiality about leg­islative proposals and their
related estimates. Even the existence of a request to the JCT for a
revenue estimate is confidential,[57] and the resulting
estimates are also confidential. Early in the history of JCT
revenue estimating, the prac­tice emerged that estimates were
released only to Members of Congress and that the Members could
then release the estimates to the general public if they so
desired.[58] Greater transparency for the JCT
revenue-estimating process could threaten this custom; but even if
this custom remains unchanged, it should nevertheless be possible
to increase the degree of transparency for estimates that are part
of a chairman's mark or scored legislation.

Members of Congress now
and then hide behind delays[59] in the revenue-estimating
process when they really do not want to support a specific tax
proposal but want to appear to do so. "We can't move without a
revenue estimate," they tell advo­cates of the proposal. In
addition, when Members wish to block a proposal, they sometimes
attack it by claiming it is based on flawed or biased revenue
estimates. The Joint Committee estimators find it difficult to
defend themselves when they are used as whipping boys in these
ways.

Oversight.The Members of
Congress who comprise the Joint Committee seldom meet, and at no
point have they conducted a meaningful inves­tigation into the
quality of the work of the JCT rev­enue-estimating staff.
Instead, Members' interests in recent years have focused on
questions relating to so-called dynamic scoring, which is the
subject of a separate paper in this series. Beyond that, there has
been no oversight of the JCT estimating process by the members of
the Joint Committee.

As a result, the task
of internal oversight has been left almost entirely to the Joint
Committee Chief of Staff, who is usually trained as a lawyer or
public administrator, not as an economist. This increases the
difficulty of supervising economists working in an arcane area.
Further, the Chief of Staff has duties that go far beyond review of
reve­nue-estimating practices. Hence, for routine reve­nue
estimates, the Chief of Staff "can obtain only a rudimentary
understanding of the staff's method­ology," according to one
former JCT revenue esti­mator. Detailed scrutiny is necessarily
left to the revenue-estimating staff itself. For more
controver­sial estimates, the Chief of Staff meets with the
estimating staff and asks questions. However, this type of review
falls short of consistent, ongoing oversight and quality
control.

Moreover, there is no
indication that this lack of oversight has been remedied to any
degree by cri­tiques from individual Members of Congress,
lob­byists, advisory groups, or the general public. Lobbyists
and the Members of Congress with whom they work may ask questions
about a reve­nue estimate with which they disagree; but once an
estimate has been completed, it is generally dif­ficult or
impossible to change,[60] especially when legislative time
constraints are severe.

Almost never do
discussions between lobbyists and revenue estimators amount to a
thoughtful critique of estimating procedures, methodologies, and
consistency. Lobbyists usually want to pro­duce a specific
result, not necessarily the right result. Now and then, a lobbyist
will share sugges­tions and insights privately, but private
sugges­tions hardly amount to a thorough investigation of the
quality of the work of the JCT revenue-esti­mating staff. A
critique of that sort has yet to be conducted.

Operating
Guidelines.The JCT
revenue-esti­mating process is not governed by any statutes or
published regulations,[61] as is the CBO process,[62] but there are
internal guidelines that are prepared by the committee
itself.

An example is set forth
in Section II(A) of the Joint Committee's Discussion of Revenue
Estimation Methodologies and Process,[63] which, under the heading
"Administrative Procedures," discusses such questions as how
estimates are requested, how the JCT staff decides which requests
to answer, how Members of Congress can obtain fur­ther
information, the confidentiality of estimates, the content of
estimates, the time periods to which estimates relate, the criteria
for doing re-estimates, and the participation of "outside parties"
in the estimating process.

Because these
guidelines are internal rather than statutory, they can be changed
by the JCT when change seems appropriate. Thus, for example, the
Joint Committee could decide to expand the num­ber of revenue
estimates it publishes on the Web so as to include substantially
all of its revenue esti­mates,[64] just as the CBO now does
for substan­tially all of its legislative cost
estimates.

Who Is Served by the
JCT?The JCT's
revenue-estimating transparency obligations sometimes become
muddled because it is not clear who should be served by the work of
the JCT estimat­ing staff. Is the JCT staff working primarily
for individual Members of Congress who "need a number" to
facilitate introduction of tax legisla­tion, or should it be
working primarily for the gen­eral public and satisfying the
public's need to know about government operations?

A facile answer is that
the JCT estimating staff should be doing both things
simultaneously, but sometimes these dual goals come into conflict.
For example, as outlined earlier, the JCT maintains strict
confidentiality about revenue estimates pre­pared at the
request of individual Members of Congress. When preparing those
estimates, the JCT operates, in effect, as a confidential
profes­sional adviser to the individual Member of Con­gress
who requested the estimate. Upon completion, the estimate
effectively becomes that Member's property, not the public's, so
the estimate is released only if the requesting Member so
authorizes. As a professional adviser, the JCT regards itself as
being in much the same position, vis-à-vis a Member of
Congress, as a private attor­ney or accountant is in relation
to a client.

A variation on this
position is the claim that dis­closure of revenue estimates
would have a chilling effect on the sound advice that the JCT
currently provides to Members of Congress and that revenue
estimates should therefore be protected from disclo­sure just
as "attorney work product" is protected from disclosure in an
attorney-client situation.

One problem with this
argument is that revenue estimates relate to proposals that have
the potential to become public laws. Once a bill is introduced, a
revenue estimate is not simply a private matter between "attorney"
and "client." Instead, estimates are an important piece of
information that the pub­lic needs to evaluate proposed public
laws. Hence, even if estimates are kept confidential while
legisla­tion is being developed, the JCT Web site should never
lack a revenue estimate for an introduced bill. Secrecy for
estimates should end when a tax bill is dropped into the
legislative hopper.

A second problem with
the attorney-client argument is that the existing practice of
publishing the JCT's revenue estimates with respect to
chair­men's marks and other scored legislation does not appear
to have had any chilling effect on the frank­ness of the JCT's
advice. Surely, if any "chill" were to occur, it would occur in
these cases.

A change in the JCT's
Member-centric orienta­tion is needed if the JCT is to achieve
the same degree of revenue-estimating transparency as the
Congressional Budget Office. Bringing about such a change will not
be easy. Members of Congress clearly benefit from having a skilled
professional staff to crunch numbers without having to release
those numbers to the public if they prove embar­rassing. Under
these circumstances, a Joint Com­mittee Chief of Staff will
need strength, some courage, and the backing of supportive Ways and
Means and Finance Committee chairmen to assert the public's right
to know against built-in congres­sional pressures favoring
secrecy.[65]

In any event, the
attorney-client argument has little relationship to other
estimating disclosure issues such as publishing the assumptions
under­lying revenue estimates, making estimating models
available to the public, and providing sensitivity analysis for
estimates.

The Congressional
Budget Office Staff

Unlike either Treasury
or the Joint Committee on Taxation, the Congressional Budget Office
operates under statutory rules that require it to provide "the
basis for each…estimate" and to make "informa­tion,
data, estimates, and statistics" obtained from other agencies
available for "public copying."[66]

In obedience to this
mandate, the CBO has developed a disclosure policy[67] that requires the
agency "to disclose the basis for each budget and mandate cost
estimate." The policy statement says this includes "disclosure of
the critical assump­tions and analytic methodologies used to
prepare the estimate." The statement also assures inter­ested
persons that the CBO will supply "further details on request."[68]
Plainly, this approach is dif­ferent from the disclosure regime
at Treasury or the Joint Committee.

However, the CBO's
basic estimating job is quite different from that of Treasury and
the Joint Com­mittee. The CBO's main job is to prepare baseline
economic forecasts involving the major economic variables: gross
domestic product, unemployment, inflation, and interest rates. It
also prepares base­line receipts estimates. These forecasts
constitute the guideposts in terms of which congressional
committees, including the JCT, can compute the effects of changes
in the tax law.

The CBO also develops
cost estimates for most legislation, and the underpinnings for
those esti­mates are published on the Web at www.cbo.gov/
CESearch.htm. However, in the case of legislation involving
income, estate and gift, excise, and pay­roll taxes, the
applicable law requires the CBO to use the estimates provided by
the Joint Committee on Taxation.[69] CBO revenue-related
analyses are limited to proposals involving tariffs, offsets, and
user fees. Proposals in these three areas are gener­ally of
minor importance to most tax practitioners.

There are some
important differences between the CBO and the JCT when it comes to
preparing tax-related revenue estimates. First, the JCT
esti­mating staff has the advantage of immediate access to the
tax attorneys on the JCT staff, who can help in significant ways to
improve the accuracy of an estimate. The CBO lacks similarly prompt
access to legal advice. "Having revenue estimators and tax
attorneys working for the same boss helps to break down barriers"
said one Washington think-tank economist familiar with both JCT and
CBO esti­mating practices. "This is particularly true," he
added, "with respect to issues such as international taxation and
depreciation."

Second, the JCT
estimating staff is often given much less turnaround time when
preparing an esti­mate than is the CBO. JCT estimators are
frequently called on to provide ballpark revenue estimates when
Members of Congress are drafting legislation. In contrast, the
CBO's Tax Division is hardly ever called on to provide ball-park
estimates. Similarly, in the course of a single drafting session,
tax legisla­tion may undergo numerous permutations, thus
requiring multiple JCT revenue re-estimates. In contrast, the CBO
is not usually required to pro­duce on-the-fly estimates and is
therefore able to focus on developing more carefully honed
figures.

The Joint Committee
routinely provides the CBO with very little information about the
bases for its revenue estimates relating to tax bills. As a result,
the CBO remains largely in the dark, just like the general public,
about the underpinnings for the Joint Committee's revenue
estimates.

Because the CBO's basic
job is to forecast the major economic variables, it finds
transparency to be in its interest. Transparency is a way of
achieving credibility for its estimates. "We have to convince the
world that we have a sensible way of doing busi­ness," a senior
CBO official recently said.

However, the CBO is not
completely transpar­ent when making its baseline estimates.
According to persons familiar with the baseline estimating process,
the CBO's internal baseline forecast con­tains a great deal of
detail that is of significant use to both CBO and Joint Committee
revenue estima­tors but is never released, even to the House
and Senate budget committees. It should be released, however, as a
means of further enhancing the credibility of the CBO's
estimates.

There is little
downside for the CBO in making its baseline estimating process
relatively transpar­ent, because its baseline estimates are
unlikely to come under political pressures from lobbyists and
special-interest representatives. "No one lobbies on the baseline,"
a Washington think-tank economist has observed. In contrast, when
the CBO makes its estimates of the costs of non-tax
legislation:

Lobbyists watch the
process carefully, hoping to find analytic errors if a score goes
against them-or to persuade analysts to adopt assumptions favorable
to their cause before the analysis begins.[70]

Rudolph G. Penner, a
former CBO director and the author of the article just quoted,
continues:

More than once I had to
hold the phone away from my ear when listening to a member of
Congress who claimed that our scoring methods had destroyed some
pet initiative that, but for our stupidity, would save the
nation.

The CBO achieves
transparency through its Web site and its publications. These
publications include annual analyses of the President's budget
proposals and twice-a-year projections of revenues by source. In
addition, the CBO produces occa­sional special analyses,
explaining how it arrives at its estimates.

An example of the
latter is the CBO's July 2003 paper entitled How CBO Analyzed
the Macroeco­nomic Effects of the President's Budget.[71]
That paper focused on the President's proposals to reduce the
double taxation of corporate income, expand tax-free savings
accounts, and extend repeal of the estate tax. It described and
compared the four models used by CBO in its estimating effort,
listed the assumptions made when applying the models, and described
some of the difficulties encountered.

II. The Arguments Pro
and Con

The Arguments for
Greater Transparency

As a theoretical
matter, the case for greater transparency in the revenue-estimating
process is nearly overwhelming. This section reviews the arguments
in favor of transparency. There are also some serious practical
problems that have to be considered and dealt with if greater
transparency is to become a reality. These are discussed in the
next section of this paper.

Theory and practice
aside, it is clear that the same degree of transparency achieved by
the Con­gressional Budget Office estimating staff when scoring
non-tax legislation should also be achiev­able by the Treasury
and Joint Committee estimat­ing staffs when dealing with tax
bills. The transparency issues presented by estimates for the two
types of legislation are similar. Furthermore, the CBO's non-tax,
cost-estimating workload is roughly comparable to the
tax-estimating work­loads of Treasury or the Joint Committee.[72]
Hence, the CBO's transparency practices should probably constitute
an irreducible minimum for Treasury and the Joint Committee to
emulate.

It is important to
decide how much transparency is desirable and why. If the
goal is merely to keep the public generally informed about
revenue-esti­mating practices, the four elements listed
earlier[73] under "Generalized Transparency" may
suffice. But if the goal is to make possible near-replication by
private parties of government estimates, substan­tially all
components of the transparency concept must be
implemented.

The basic arguments
favoring greater transparency in the revenue-estimating process are
as follows:

Argument #1:
Self-Government

In a democracy, citizen
access to information is fundamental. Without adequate information,
self-government is impossible.

Tax policy judgments in
the executive branch and Congress are influenced, often decisively,
by revenue estimates and distributional analyses. A democratic
approach to the tax policy process requires that the decisive
elements in the process, including revenue estimates, be open to
public understanding and scrutiny.

At present, Congress
mandates transparency for the budget and cost information estimated
by the Congressional Budget Office. Tax estimates are no less
interesting and important in the public debate, and they should be
equally open to the public.

Argument #2:
Credibility

The usefulness of a
revenue estimate is severely limited if the estimate is regarded as
questionable by those who must make policy on the basis of the
estimate. Revenue estimates have been challenged by critics for
many decades; but 25 or more years ago, they were more likely to be
accepted without much question in the course of political debate
simply because they came from an official source that was generally
deemed to be reliable. Revenue estimates require more supporting
information to be credible today, at a time when the survival of
proposed legislation often depends on the assumptions and
conclusions of Treasury or Joint Committee estimators.

Revenue estimates will
be more credible to deci­sion makers, the press, and the public
if they describe not only the general methodology used to create
estimates, but also the specific assumptions, procedures, and data
used to produce a given esti­mate. Disclosure of these
underpinnings of a reve­nue estimate will significantly
increase the credibility of the estimate itself, and that, in turn,
will facilitate the legislative process by lessening or eliminating
distrust of the estimating process.

If revenue estimates
are not based on publicly available facts, it becomes all too easy
to claim that they are a result of political considerations rather
than careful analysis. In this environment, revenue estimators can
easily become pawns in a political struggle, and there is danger
that the revenue-esti­mating process will be improperly
denigrated.

"The credibility of a
revenue estimate," a former Joint Committee Chief of Staff recently
stated, "is built by transparency. Transparency helps dispel the
idea that revenue estimates are the product of some sort of 'black
box' or that they are produced by throwing darts at a
dartboard."

In addition, when
estimates are not credible, political debate is likely to focus on
the num­bers-on the relative merits of conflicting
esti­mates-rather than on policy. Formulating tax policy is
difficult enough without the further com­plication of dueling
revenue estimates. Debates about revenue estimates can sometimes be
smoke screens for differences over policy. However, by minimizing
the mystery surrounding revenue esti­mates, transparency can
make it easier to move beyond doubts about the numbers and focus
instead on the underlying tax policy issues.

Of course, like weather
forecasts, revenue esti­mates will never be fully credible. The
process of forecasting is premised on the realization that actual
events are likely to turn out differently than originally forecast.
The real issues in forecasting are how far off the mark estimates
turn out to be, whether the degree of error can be reduced, and
what steps can be taken to buttress the credibility of future
forecasts.

Some Treasury observers
argue that the avail­ability of information about the
underpinnings of a particular estimate will facilitate the creation
of competing estimates on the same subject, thus weakening the
credibility of the first estimate. This is certainly true if the
underpinnings of the first estimate turn out to be weak, but
openness, com­petition, and honest debate are not likely to
weaken a sound estimate. In fact, competition can strengthen an
estimate, especially if its authors revise and improve it in
response to competing estimates.

Hence, although
promoting transparency in the revenue-estimating process may not
strike tax pol­icymakers as a priority issue, greater
transparency is in their interest. Transparency will make more
credible the figures they use to formulate policy, and that will
improve the quality of the policy debate by focusing it on the
actual tax changes being proposed rather than on the methods used
to estimate costs and revenues.

Argument #3:
Improving Consistency and Quality

Present and former
revenue estimators state that the revenue-estimating staffs at
Treasury and the Joint Committee prepare relatively little internal
documentation of their estimates, other than their own notes, even
in the case of major tax legisla­tion.[74] They also state
that documentation prac­tices vary from one estimator to
another.[75] These facts mean that internal review is
difficult or impossible and that consistency from one estimate to
another is hard to achieve. It also means that quality control is
generally lacking.

Greater transparency
would make this situation clear (which is one of the reasons why
greater transparency is likely to be resisted); and by mak­ing
the situation clear, greater transparency will produce pressure for
greater consistency in esti­mating. It will also facilitate
development of mean­ingful quality controls.

To improve accuracy and
consistency, govern­ment revenue estimators should routinely
prepare technical estimating memorandums with respect to their
estimates, or at least each significant estimate, and those
memorandums should be made publicly available. Former government
estimators now in the private sector routinely prepare memorandums
of this sort for submission to clients and govern­ment
agencies. They view this as a necessary part of their service
because they know their estimates will be more credible if they are
carefully documented.

Indeed, the
documentation process may improve estimates by uncovering
overlooked errors in esti­mating methodology. Technical
memorandums have quality-control value in their own right because
preparing documentation, by itself, helps to correct errors, even
if the documentation is used only for internal review. In addition,
documentation can provide a basis for supervision to enhance
con­sistency and quality.

Argument #4:
Facilitating Public Comment

Greater transparency
will facilitate critiques by outside parties of the techniques used
to prepare revenue estimates. Many of these critiques will come, of
course, from self-interested private par­ties and their
lobbyists, who will point out the faults, but not the strengths, of
estimates that affect them. But even one-sided critiques are likely
to contain elements of truth, and not all the critiques will come
from interested parties; some will come from disinterested parties
including think tanks, universities, and independent
scholars.

The situation is
similar in the case of proposed tax regulations, which are
published in the Federal Register in response to the mandate
of the Admin­istrative Procedure Act (APA).[76] Under APA
proce­dures, most comments come from interested parties and are
appropriately discounted for bias by the individuals in charge of
the regulations project. Regulators nevertheless glean from them
the wisdom they contain, which is sometimes con­siderable.
Valuable comments also come from dis­interested agencies and
individuals seeking to serve the public by improving the
proposals.

Public critiques of
regulations-including self-interested critiques-seldom make
regulations worse, and they often make them better. There is no
reason to think the situation would be different in the case of
revenue estimates.

Argument #5:
Accountability

Oversight and
accountability are important to any institution. Without
accountability, standards slip and there is little pressure for
improvement.

As outlined earlier,
there is not much internal oversight, and almost no external
oversight, over the revenue-estimating processes at Treasury and
the Joint Committee. In addition, there is anecdotal evi­dence
that at Treasury and the JCT, careful docu­mentation of
estimates is infrequent, consistency is difficult to maintain, and
quality-control measures are nonexistent. Greater transparency
would help to put these fears to rest, assuming they are
ill-founded; and if those fears were correct, enhanced
transpar­ency would create pressure for improvement.

Are there agencies that
could peer review the Treasury and Joint Committee's estimating
work, assuming it were more open to the public? Thirty years ago,
the answer to that question was proba­bly "no";[77]
today, however, there are several answers. Two of the major
accounting firms now have significant revenue-estimating
capabilities,[78] and the others have expertise in the
area. However, not much of this capability would be diverted to a
critique of Treasury and JCT estimating efforts unless those
efforts happened to run counter to a client's interests.

More important, a
number of nonprofit groups have both a strong interest in the
estimating pro­cess and a fair amount of estimating capability.
These groups include The Heritage Foundation, the Urban-Brookings
Tax Policy Center, the National Bureau for Economic Research, the
Amer­ican Enterprise Institute, Citizens for Tax Justice, and
the Center for Budget and Policy Priorities. They span the
political spectrum and are therefore likely to enrich the
estimating debate with oppos­ing viewpoints. Additional groups
will get involved in the revenue-estimating debate if increased
availability of information makes that involvement
possible.

Both the Government
Accountability Office and the National Science Foundation also have
the capa­bility to provide oversight and peer review of the
revenue-estimating process at Treasury and the JCT.

Further, if there were
greater transparency in the estimating process, both Treasury and
the Joint Committee could more readily critique one another's
estimates. With a few rare exceptions, this is something that has
not occurred with much frequency in recent years. According to
govern­ment sources, relations between the JCT and
Trea­sury in the relatively recent past have at times been icy,
but an ongoing dialogue between the two reve­nue-estimating
staffs nevertheless continues. Greater estimating transparency
might facilitate growth of this cooperative dialogue between the
two agencies to the benefit of both.

In addition, greater
transparency will enable the private sector to improve the revenue
estimates that are made with respect to specific pieces of
leg­islation by contributing private iterations of the original
government estimates. This might initially increase government
estimators' workload by making it necessary to justify or revise
their origi­nal estimates, but it would, at the same time, also
help to spur debate and thus contribute to the improvement of
estimating techniques.

Argument #6:
Improving the Science

At present, there is
almost no way to suggest improvements in the Treasury and Joint
Commit­tee revenue-estimating processes because almost no one
has enough information about those pro­cesses to comment on
them usefully.[79] Academics and others cannot critique the
models used, the press and the public cannot comment on the
validity of estimating assumptions, and limitations and
deficiencies in the data cannot be pointed out and perhaps
corrected.

Greater transparency
would foster discussion of what needs to be done to improve the
revenue-estimating process and make its results more accu­rate.
That discussion would benefit both the pub­lic and the
estimating agencies themselves.

Argument #7:
Promoting Research

At present, in the
words of a senior Treasury economist, university economics
departments "don't teach revenue estimating." Furthermore, he said,
only a few prominent academics have an interest in the
subject.

It is difficult to
teach, or to have an interest in, a subject about which very little
is known. Greater transparency for the revenue-estimating process
could change that situation. For the first time, there would be a
body of information that could be analyzed and discussed in class
or become the basis for scholarly articles. Revenue-estimating
issues could take their place as part of the public-finance
curriculum. The resulting dis­cussion and debate could improve
the revenue-estimating process.

The Arguments Against
Increased Transparency

There are four main
arguments, and a few minor arguments, against increased
transparency for the revenue-estimating process. They are listed
below in descending order of importance.

Argument #1:
Destroying What One Seeks to Reveal

Proponents of greater
transparency frequently assume that disclosure efforts will cause
more information to reach the public, but this is not always the
case. Thirty years of tax-related experi­ence under the Freedom
of Information Act makes it clear that court-ordered disclosure of
a particu­lar type of document often leads tax agencies to stop
producing that type of document.[80] This is especially the
case when agencies lack the staff or the mandate to promote
disclosure. In such cases, disclosure efforts can effectively
destroy what they seek to reveal.

Revenue-estimating
documents could be a case in point. For example, it is now common
practice for an estimator at Treasury or the Joint Commit­tee
to note the assumptions used when making an estimate. The
estimator's notes may also include a list of data sources. If lists
of assumptions and data sources are put into the public domain,
estimators may simply stop preparing them. Or they may list only
the most reliable assumptions and sources, omitting the rest. If
that happens, disclosure efforts will have curtailed or destroyed
what they sought to reveal.

This perverse result
could be mitigated in various ways. If the agency is committed to
full disclosure and realizes the benefits of disclosure both to the
estimating process and the agency, transparency efforts may
succeed. So too, if the agency operates under a statutory or other
disclosure mandate (as does the Congressional Budget Office),
disclosure is likely to be regarded as part of the agency's job,
and disclosure initiatives will have a greater chance of being
adequately funded and staffed.

However, in the absence
of careful prior planning to avoid or mitigate the tendency of
disclosure to destroy what it reveals, greater transparency for the
revenue-estimating process could produce a disaster rather than a
victory for public participation and the democratic
process.

Argument #2:
Politicization

Revenue estimators are
currently the vestal vir­gins of the tax legislative process.
Traditionally, poli­cymakers have sought to shield estimators
from the pressures of politics so that the revenue figures they
produce will have unassailable scientific authority.[81] In
this scenario, politicians are seen as unwanted interlopers in
sacred precincts, anxious to "cook the books" by manipulating
assumptions and data sources. Secrecy is felt to protect the
estimating pro­cess from these pressures.[82]

And perhaps it has.
There is no recorded instance in which a Treasury or Joint
Committee revenue estimator has accused his superiors of forcing
him to accept estimating assumptions or methods with which he did
not agree.

Nevertheless, the
political pressures are persis­tent and real. One former
Treasury officialdescribes how he seemed
to "spend half my time" shielding the revenue estimators on his
staff from pressures brought to bear by Congress and his own
Administration. So it is hard to believe that the secrecy dike
designed to protect estimators from political pressures never
springs a leak.[83]

Fear of politicization
has led to the physical and social isolation of the
revenue-estimating staffs from other tax policy staffs at the JCT
and Trea­sury. As a former Treasury estimator puts it, "A
trade-off has been made at both JCT and Treasury to 'protect the
revenue estimator,' which has had the partially intended effect of
making the estima­tion process more secretive, and the staffs
isolated and less accountable to their peers (but not less
accountable to politicians and political appoin­tees). The
current separation of revenue estimating from public tax policy
analysis," he continues, "has prevented a lot of good economic
analysis from being included in the public policy debate." He
concludes that "The separation of the revenue esti­mating staff
from the policy economists at both JCT and Treasury, and their
general isolation from the rest of the economic and public policy
com­munity, has been detrimental to the policy debate, the tax
staffs, and the individual revenue estima­tors
themselves."

Disclosure advocates
should recognize the gen­uineness of agency concerns that
greater transpar­ency for the revenue-estimating process will
politicize it. At a minimum, these advocates need to consider how
to protect the integrity of the pro­cess even though it becomes
more open to scru­tiny by those who seek to influence it. In
addition, protection for the estimators themselves, both from
unwelcome publicity and from undue politi­cal pressure, is also
very important.

The example of the
Congressional Budget Office is instructive. It has had a succession
of strong, capable directors, willing to protect their
estimat­ing staffs from pressures brought to bear by
out­siders.[84] The same is true at both Treasury and the
Joint Committee, so this essential bulwark against politicization
is in place. Written rules and prac­tices, modeled on those in
place at the CBO,[85] would help to reinforce and solidify the
protec­tions provided by strong tax administrators.

Argument #3: Lack
of Staff Resources

Enhancing the
transparency of the revenue-esti­mating process is a
labor-intensive exercise. At bottom, it is no different from any
other kind of publishing. Publishing typically involves writing,
editing, revising, and classifying information and creating formats
and indexing tools to facilitate access to that information by
interested users. Enhancing transparency is not a job that can be
done by estimating staffs that are already belea­guered and
overworked. Transparency requires more staff time, more writing,
more review, and a set of skills not commonly taught in economics
classes. In addition, staff time will have to be spent evaluating
and responding to comments from out­side groups.

Just how overworked are
the Treasury and Joint Committee revenue-estimating staffs? And how
much labor would be required to bring their work into the public
domain? The short answer to both those questions is that no one
really knows, not even the agencies themselves.

Accurate statistics are
unavailable partly because there is no agreement about what
constitutes a "revenue estimate." For example:

Is guidance by an
estimator in the course of a telephone call to be counted as a
"revenue estimate"?

Is an in-depth estimate
requiring hundreds of hours of staff time to be given the same
weight as an "easy" estimate that can be dashed off in the course
of an afternoon?

If an estimate
regarding a specific tax proposal is rerun six successive times on
the basis of six variations in a crucial assumption, does that
count as one estimate or six estimates?

If an estimate is
redone multiple times to take into account successive changes in
the lan­guage of a legislative proposal, does that
con­stitute one estimate or many estimates?

If a prior revenue
estimate is rerun against an updated macroeconomic baseline[86]
without other changes, does that count as one estimate or
two?

Because answers to
these questions are essen­tially arbitrary, it is difficult or
impossible to pro­duce meaningful workload statistics relating
to the revenue-estimating process.

However, no matter how
the term "revenue esti­mate" is defined, it is clear that the
number of esti­mates prepared by the Treasury and Joint
Committee staffs has increased steadily over the years.[87] It
is also clear that both staffs are sub­jected to unmanageable
time pressures during the closing days of a congressional session
and (in the case of Treasury) during the preparation of the annual
federal budget. But periods when time pressures are unmanageable
are juxtaposed with periods of calm after a legislative session
concludes (or, in Treasury's case, after the President submits his
budget to Congress). So, again, workload anec­dotes do not
reveal the whole story.

When asked, Treasury
states that full transpar­ency for revenue estimates would
require it approximately to double the size of its existing
revenue-estimating staff. This would involve increasing that staff
from 13 to 26 professionals, plus support staff. That estimate
sounds unrealisti­cally high, particularly in light of the
Congres­sional Budget Office's experience in implementing
transparency initiatives. Nor is it clear how much of this
additional staff would be needed to do work-such as quality control
and documentation of estimates-that ought to be done already (but
often is not).

However, suppose
Treasury is right and that full transparency for its
revenue-estimating process would require it to double the size of
its estimating staff. That would cost $2 million-$4 million per
year. This seems a relatively small price to pay, given the crucial
role that revenue estimates play in the tax legislative
process.

In summary, advocates
of transparency need to recognize that enhancing the transparency
of the Treasury and JCT revenue-estimating processes is going to
require additional staff resources. The benefits of greater
transparency, though intangible, are likely to be well worth those
additional costs.

Argument #4:
Confidentiality of Returns

A major objection to
disclosure of the data used to make revenue estimates (as
contrasted with merely listing data sources) is that the Internal
Revenue Code strictly prohibits revealing tax return data and
imposes both civil and criminal penalties for violations of that
rule.[88] Since Trea­sury and JCT revenue
estimates rely heavily on tax return data, the prohibition on
disclosure of return information makes it impossible to release the
pre­cise data used to make Treasury and JCT
estimates.

For example, there is
probably no way in which the data underlying so-called rifle-shot
tax legisla­tion-i.e., legislation designed to benefit only one
(or at most a few) individuals or firms-could ever be released.
Release of the data underlying such estimates would almost
certainly jeopardize taxpayer confidentiality. However, most
revenue estimates relate to broad-based legislation, not to "rifle
shots."

Fortunately, the
Statistics of Income Division within the IRS Office of Research,
Analysis, and Statistics prepares a special compilation of tax data
known as the "public-use file," which contains return data that
have been appropriately homoge­nized to protect taxpayer
privacy. These are not precisely the same data used by
Treasury and the JCT when making estimates, but they are as
simi­lar as possible given the need to preserve tax return
privacy and confidentiality.

The availability of the
public-use file has been an essential element in development of
private accounting firm and think-tank revenue-estimat­ing
capabilities over the past 30 years.[89] In addi­tion, the
public-use file provides an example of how government efforts to
enhance transparency can support and spur helpful private-sector
initia­tives in the revenue-estimating area.

However, there are
serious problems with the public-use file.

First and most
important, the public-use file contains only individual tax return
data. A public-use file containing at least a limited amount of
small- and mid-size business return data (both corporate and
non-corporate) should also be made available. This suggestion is
discussed later in this paper.

Funding for production
of the IRS public-use file is currently very limited. More
resources are essential, especially if a business return public-use
file is to be produced. It is up to Treasury to request those
resources.

Lack of timeliness is
another serious problem. In recent years, there have been two- to
three-year delays in production of the public-use file.[90]
Some of these delays were apparently attributable to lack of
publication funds. Publication has also been delayed by IRS
concerns that the growth of pri­vate-sector computational
power, the increasing availability of cross-matching financial
data, and developments in record-linking mathematical models might
make it possible to obtain individual tax return information from
the public-use file, especially in the case of high-income
individuals.

The problems associated
with delays in pro­duction of the public-use file are
compounded when government revenue estimators base their estimates
on updated or corrected public eco­nomic data that have not yet
been published by the compiling agency. Use of not-yet-published
data is entirely appropriate when such data are available to
government estimators, since the goal is to produce the most
accurate possible revenue estimates; but to avoid public confusion,
use of not-yet-published data should be mentioned in any estimating
memorandums that accompany revenue estimates.

IRS concerns about
possible disclosure of indi­vidual tax return information in
the public-use file have been made even more acute by the growing
use of "longitudinal" data-i.e., data covering more than a single
year-in the revenue-estimat­ing process. Using longitudinal
data helps to make revenue estimates more accurate than those
pro­duced using only annual, cross-sectional data.

However, the
availability of longitudinal panel data produces a concentration of
information for one individual, and thus makes it easier to
identify individual taxpayers. This fact will make it
increas­ingly difficult to disclosure-proof the public-use file
if longitudinal data are included, as they should be.

These concerns have led
the IRS Statistics of Income Division to hire outside contractors
to improve the "disclosure-proofing" of the public-use file.
Release of the file was significantly delayed while the contractors
finished their work. The IRS needs to prevent those delays from
recurring.

The public-use file
also omits data that could be included without jeopardizing
taxpayer privacy, such as age distribution data. Private estimators
are unhappy about these omissions, which seem unjustified on
privacy or other grounds.

Argument #5: A
Reduced Role for Judgment

Good professional
judgment is a crucial, appro­priate, and required component of
revenue esti­mating. It is what makes revenue estimating an art
rather than a science.[91] Opponents of disclosure fear that
enhanced transparency would make esti­mators less free to
exercise independent profes­sional judgment, especially in
cases in which they cannot readily document the basis for their
beliefs and assumptions. Instead, they fear, estimators will tend
to base their estimates on more easily jus­tified mechanical
standards.

Typically, the
judgmental part of a revenue esti­mate relates to the
behavioral component (the "what will the consequences be" part)
rather than the static component (the "what does one deduce from
the current data" part). Professional judg­ment is necessarily
involved when estimating the likely behavioral response to a tax
change. Some­times judgment is required because little or no
empirical evidence is available. In other instances, ample evidence
is available,[92] but judgment is required to interpret
it.

In these cases,
adopting a mechanical alternative to the use of judgment is simply
not feasible. There is nothing wrong with the use of judgment in
these instances, provided the judgment is dis­closed and
explained. Government regulators use judgment all the time. Making
behavioral judg­ments public will assure greater consistency
across revenue estimates with respect to behavioral responses, and
that is all to the good. If the judg­ment is sound, it will be
able to withstand public scrutiny.

Argument #6:
Delay

Greater transparency
will inevitably slow the production of revenue estimates, both
because each step in a transparent estimating process is likely to
be documented with care (rather than with informal notes or not at
all) and because additional review is likely to be given to
publicly released revenue estimates and documentation. Providing
additional staff will ameliorate but not necessarily resolve this
problem.

Some amount of delay
may have to be regarded as the price of additional transparency.
Policymak­ers will have to plan accordingly. Offsetting this
cost, however, is a clear benefit: Revenue esti­mates, once
they are released, will be more accu­rate because they will
have been reviewed with care so they can withstand the light of
day.

Argument #7:
Confusing the Debate

Opponents of
transparency for the revenue-esti­mating process argue that
revealing the underpin­nings for a revenue estimate might
distract attention from the proposal itself and transform the
debate on the proposal into an argument over revenue-estimating
methods.

If there are grounds
for suspecting that a reve­nue estimate is unsound, this might
certainly occur. However, if a revenue estimate is ques­tioned,
is the ensuing debate a good thing or a bad thing? For many years,
legislators, the press, and the public have been accustomed to
accepting rev­enue estimates as not-to-be-questioned "givens."
As a consequence, some serious errors and bad judgments have
doubtless been obscured from view. Why is it inappropriate, at
last, to provide a basis for questioning the process?

There will certainly be
cases in which the tax debate is distracted by a dispute over
estimating procedures. In some cases, we may be confronted with
several differing revenue estimates, each from a different source.
But that is healthy, not bad.

As a result of honest
public debate, adjust­ments will be made in the estimating
process, procedures will become accepted and far better understood,
and consensus will emerge. What will have disappeared is pervasive
suspicion about the validity of the numbers, the possible biases of
the estimators, and the rationality of the estimating process.
Bloodying one's nose in an occasional dispute over numbers is a
small price to pay for long-term certainty about the integrity of
the revenue-estimating process. As public con­fidence in the
quality of revenue estimates grows, the debate can again focus on
the merits of the tax policy issues at hand.

Argument #8: Loss
of Mystique

Thirty or more years
ago, revenue estimates had very nearly the authority of utterances
from the ancient oracle at Delphi, at least to outsiders.[93]
Like the utterances of the oracle, estimates resulted from a
mysterious and secretive process known only to a few. Estimates
could seldom be chal­lenged, and few dared to try.

Today, much of this
mystique has been lost, partly as a result of the spread of
revenue-estimat­ing capability in the private sector and slowly
growing public knowledge about the nuts and bolts of the estimating
process. Opponents of transparency fear a further loss of authority
if even more information is revealed about the Treasury and JCT
estimating processes. For example, at an Airlie House conference in
1988, David Brockway, who was then Chief of Staff of the Joint
Commit­tee, told the conferees:

[W]e generally attempt
to avoid laying out what our estimating model is, and how we've
reached our conclusions, so that people can't come back and
challenge those aspects of the estimate that lead to results they
don't like….[94]

The short answer to
these concerns is that, in a democracy, authority should be earned
rather than based on one's position or on privileged access to
information. In the case of revenue estimating, this means that the
authority of a revenue estimate should derive from the
reasonableness of the assumptions on which an estimate is based,
the comprehensiveness and recentness of the data used, and the
clarity of the reasoning applied to produce the
estimate.

Regrettably, however,
lack of transparency in the Treasury and JCT estimating processes
makes it impossible at present for those agencies to rely on these
legitimate sources of authority. Meanwhile, the deference
traditionally accorded to their pro­nouncements continues to
erode.

III. Lessons from
Others

Lessons from the
States

At the state level,
revenue and cost estimates play a central, crucial role in the
legislative pro­cess. That role is even more important than at
the federal level because substantially all states have a balanced
budget requirement of some sort. With­out accurate estimates of
likely revenues and expenditures, it is not possible to know
whether balance has been achieved. In effect, revenue
fore­casts establish the allowable parameters of annual state
budgets.

Given these facts, "The
federal government has a lot to learn [about revenue estimating]
from the states," according to James Francis, Director of Tax
Research for the Florida Department of Revenue and a member of the
Joint Committee on Taxa­tion's 1989 Advisory Board.[95]
"We have the ulti­mate fiscal constraint-a balanced budget with
no fudging," Francis said. "Thus we have been facing the problem of
revenue-driven tax legislation for a long time."

Because almost all
states require balanced bud­gets, it is natural for disputes to
arise over the accuracy of state-level revenue estimates and the
reliability of the process that produces them. Some states have
found themselves embroiled in budget disputes that are rooted in
numerical duels over estimating assumptions and methods. These
dis­putes have sometimes slowed and disrupted the legislative
process. In contrast, when state legisla­tors and executive
branch officials adopt similar estimating methods and "use the same
numbers," that fact "greatly aids the legislative process."[96]

Consensus Revenue
Estimating.To deal with disputes
over revenue estimates, about half the states[97] have adopted what
is known as "consen­sus revenue estimating." The consensus
estimating process involves a concerted effort, prior to a
legis­lative session, to resolve disputes over the likely
revenue and expenditure figures that will be included in an
upcoming state budget.[98] The Council of State Governments
describes the pro­cess in the following words:

By far the most
interesting trend in recent years is the movement by states away
from forecasting dominated by the executive or legislative branch
to a method known as "consensus estimating."… Consensus
revenue estimating involves participants from the legislative and
executive branch, as well as representatives of business and
academia. Through discussion and analysis, these members must come
to unanimous agreement on the estimates for the coming fiscal year.
While no forecasting method is ever 100 percent accurate, studies
show that on average a consensus forecast will be more accurate
than any of the individual forecasts that compose the consensus.[99]

The consensus
estimating process almost always includes representatives of the
state treasury or finance commissioner as well as legislators with
budget and tax responsibilities. It may also include state
university representatives,[100] especially if the
university assists state agencies in the revenue-esti­mating
process. In addition, it may include repre­sentatives of
private industry and the press.

In some cases, the
consensus process is quite informal. Legislative and executive
branch officials simply get together for a detailed discussion a
few weeks before the opening of a legislative ses­sion.[101] This gives them a chance to compare
their approaches to current estimating issues, discuss their
assumptions and data sources, and resolve differences in their
numbers.[102]

Consensus estimating
can also take the form of a large one-or-two-day conference, with
hundreds in attendance, formal papers, and press and
televi­sion coverage.[103] It may also include a
smaller conference a week or two after the main session to report
the results of additional research suggested at the main conference
a few days before.

Consensus estimating is
an essentially public process. Its goals are to produce agreement
on the basic numbers that comprise a state's annual bud­get and
to increase the credibility of the claim that a state's budget is
actually balanced. Those goals would be much harder to achieve if
budget esti­mates were prepared in secret. "Through openness in
estimating you get credibility," according to a Florida tax
official.[104] A senior Michigan official says, "Doing
an estimating conference publicly allows legislators to see how the
forecast is done; this gives increased credibility to the
numbers."[105]

States also estimate
the costs of particular pieces of legislation, just as the U.S.
Treasury and the Joint Committee on Taxation do. But they do not
generally do this in public, at least not for routine
legislation.

However, if a major tax
or spending proposal is put forward, the estimated budget effects
of the proposed change will sometimes become the basis for a
supplementary consensus estimating confer­ence. In addition,
some states schedule extra con­sensus estimating conferences
when a legislative session moves past a major milestone, such as
adoption of the annual budget or the close of a leg­islative
session.[106] These supplementary confer­ences
necessarily include the budget adjustments required by specific
pieces of legislation. In this way, "micro-estimates" with respect
to specific leg­islation are subjected to indirect review by
consen­sus estimating conferences.

Consensus revenue
estimating is not merely a process of forging a compromise between
a state's executive and legislative branches. Consensus
esti­mating is also a public process that enables the
press, the business community, and the public to understand and get
involved in making and refin­ing revenue estimates.

The spread of consensus
revenue estimating shows the usefulness of having a focused public
discussion of budget numbers and estimating pro­cesses as a
means of making budget estimates more accurate and building public
confidence in the numbers themselves. The federal
revenue-esti­mating process would benefit from similar
discus­sions of important estimates.

Fiscal
Notes.In many states,
so-called fiscal notes accompany the revenue estimates provided to
state legislators with respect to specific legisla­tive
proposals. Fiscal notes vary in scope and qual­ity from one
state to another, and they are not always made available to the
public. However, some states prepare excellent notes and routinely
publish them.[107]

Fiscal notes generally
provide revenue gain or loss figures, explain current law, discuss
a proposed legislative change from a revenue point of view, and
outline the assumptions and data sources used in estimating the
gain or loss attributable to the legisla­tion. In many
respects, they resemble the cost esti­mates prepared and
published on the Web by the Congressional Budget Office.[108]

Similar notes should be
published by Treasury and the Joint Committee. State legislative
sessions are usually short and intense, and state revenue
estimators are often more pressed for time than their counterparts
in Treasury and on the Joint Committee. Hence, if state estimators
can produce useful fiscal notes in the heat of a brief legislative
session, Treasury and the Joint Committee should be able to do so
too.

International
Experience

During the past 20
years, many countries have moved to enhance the transparency of
their fore­casting systems. In most cases, however, their newly
developed transparency principles have yet to be applied to revenue
estimates relating to indi­vidual tax bills. This section
briefly reviews the trends in international estimating
transparency.

Australia.Australia's 1998
Charter of Budget Honesty Act sought to make the public "better
informed about public finances" and to assure "transparency in
fiscal policy."[109] The Act requires publication prior to
each election of a "Pre-Elec­tion Economic and Fiscal Outlook"
that includes information about the methodology and
assump­tions used in making the forecast. In addition, it
requires a costing of national political candidates' major campaign
promises. The Charter also requires "Budget Outcome" reports
annually and "Intergenerational Reports" every four
years.

Canada.The Canadian
government undertook a review of its economic forecasting methods
in 1993. Based on that study, the government opened up its budget
and forecasting processes. The key aims were to restore credibility
to the budget pro­cess, gain acceptance by financial
commentators, and shift the debate from the forecasting methods to
the policy issues.[110]

Denmark.Statistics
Denmark, the national statistics bureau, makes its economic
forecast model available to anyone. The annual budget includes
spreadsheets with information about the assumptions used in making
the relevant baseline estimates.[111]

Germany.Revenue forecasts
in Germany are reviewed by the Working Party on Tax Revenue
Fore­casting, which advises the Federal Ministry of Finance.
Six private-sector economic research insti­tutes are included
in the Working Party. The Working Party's procedures somewhat
resemble the consensus revenue-estimating procedures used by many
U.S. states, including use of a press conference to present the
Working Party's results to the public.[112]

Sweden.In addition to
publishing revenue esti­mates and forecasts, the Swedish
National Finan­cial Management Authority provides
private-sector users with "the information to make their own
assessments and analyses," including the assump­tions used by
the Authority in its forecasts.[113]

United
Kingdom.In 1997, the British
govern­ment embarked on a "radical overhaul" of its monetary
and fiscal policy. "The principle of cred­ibility through
maximum transparency" was the third of four basic principles behind
the changes. As explained in a U.K. Treasury publication issued in
2002:

[T]he greater the
degree of transparency about the government's objectives and the
reasons why decisions are taken, the more information about
outcomes that is published as a matter of routine, and the more
checks on the ability of government to manipulate the flow of
information, the less likely is it that investors will be
suspicious of the government's intentions, the greater the
flexibility of policy to react to real crises and the easier it is
to build a consensus for difficult decisions.[114]

With respect to tax
issues, states the U.K. Trea­sury text, "The Government
believes that transpar­ency should be the rule rather than the
exception," adding that:

Transparent government
is a fundamental part of a democracy. It ensures that Parliament
and the wider public can scrutinize the Government's economic and
fiscal plans. It is likely to encourage governments to give more
weight to the longer-term consequences of their decisions, leading
to more sustainable fiscal policy. It also encourages people and
business to plan for the longer term, so that resources are
allocated efficiently.[115]

Another aspect of the
British initiative is publica­tion of a new type of fiscal
policy document known as a Pre-Budget Report, which appears three
months prior to the budget itself. This report results from a
belief that "The Budgetary process has for too long been shrouded
in secrecy." By outlining "the signifi­cant policy proposals
under consideration for dis­cussion in the budget," the U.K.
Treasury hopes "to stimulate a national debate about the major
eco­nomic issues" presented in each year's budget.[116]

Although it is a
written document, the British Pre-Budget Report has the same
objectives as the consensus revenue estimating conferences held by
many of the U.S. states prior to the introduction of their budgets,
as described earlier.[117] Both con­sensus estimating and the
Pre-Budget Report seek to stimulate debate, solicit public comment
on fis­cal issues, and resolve differences in advance of actual
introduction of a budget.

International Monetary
Fund.The Interna­tional
Monetary Fund (IMF) has been at the fore­front in promoting
transparency in fiscal affairs on a worldwide basis. Its principal
tool for doing this is its Code of Good Practices on Fiscal
Transparency.[118] The code promotes the timely and
comprehensive reporting of fiscal information, open preparation of
budgets, and enhancement of fiscal credibility through external
audit and independent scrutiny.

The IMF's transparency
code has been supple­mented by a Manual on Fiscal
Transparency,[119] which provides guidance on the
transparency code's practical implementation and contains
illus­trations of good transparency practices. In the case of
baseline estimates, the manual advocates publi­cation of the
economic assumptions underlying revenue forecasts, plus any
adjustments to the forecast to reflect exogenous variables, and
"infor­mation on the [forecasting] models used."[120]

Organisation for
Economic Co-operation and Development.In February 2003, the
Organisa­tion for Economic Co-operation and Development (OECD)
launched a broad survey on worldwide budget practices and
procedures. About 60 coun­tries will eventually be included in
the initial sur­vey sample. Among other issues, the survey
seeks to compile country-by-country information on the
"transparency of budget practices of government agencies."[121]

IV. Proposed
Improvements

The need for greater
transparency in the reve­nue-estimating process at the federal
level in the United States seems clear. The arguments in favor of
transparency, both theoretical and practical, overwhelm the
drawbacks. The need for change is especially apparent at Treasury.
Change is also needed at the Joint Committee on
Taxation.

In contrast, within its
areas of responsibility, the Congressional Budget Office seems to
be doing its best to promote a transparent forecasting regime.
Perhaps more could be done, but the agency has made a good start
along the road to full transparency.

Calls for greater
transparency on the part of Treasury and Joint Committee revenue
estimators have been made for a long time, but without much
result.[122] Clearly, something must be done to
con­vince these two agencies that it is time to address the
transparency problem seriously and to devise responses that will
work.

Some Guiding
Principles

It is important to keep
costs and benefits in mind when devising solutions to transparency
problems. For example, it is clear that publishing in-depth
supporting analyses for thousands of rev­enue estimates would
not be worth the cost. Few people would use most of them. But
publishing detailed analyses for proposals that are important for
revenue or other reasons makes a great deal of sense. A careful
weighing of costs and benefits is therefore needed when deciding
which revenue estimates require in-depth supporting
analysis.

In the end, however,
asking about the costs and benefits of transparency is a little
like asking about the costs and benefits of democracy in contrast
to other forms of government. In both cases, the evaluation
involves weighing intangible values against tangible costs.
Cost-benefit analysis can help us come up with sensible solutions
that work, but in the end, we cannot quantify the intangible values
at stake.

When devising solutions
to revenue-estimating transparency problems, it is also important
to avoid proposals that create an "us versus them" reaction on the
part of Treasury and the Joint Committee or that reinforce the
existing siege mentality that too often affects the
revenue-esti­mating staffs.[123] Both agencies need to
recognize that greater transparency for the revenue-estimat­ing
process has benefits for them and for the pub­lic, not just
drawbacks, and need to know that their concerns and staffing
requirements will be taken into account when resolving transparency
problems.

It is also important to
make it clear that calls for greater transparency do not constitute
an attack on Treasury and JCT revenue estimators. These
indi­viduals are professionals who do their best under
sometimes difficult circumstances. The work they produce can make a
significant contribution to the tax policy debate if it is made
more broadly avail­able to the public and if the estimators
themselves are encouraged to play a larger, more visible role in
the tax policy community. Enhanced transparency can help to show
that, far from being second-class citizens, revenue estimators are
among the best of public-finance economists.

In general, the details
of effective, lasting solu­tions to transparency questions can
best be devised by the affected agencies themselves. They know
their procedures better than any outsider possibly can. They are
also better positioned to conduct experiments to find out what
solutions work or do not work. And it is they who must request the
additional staff necessary to implement any effective solution. The
impetus for change probably has to come from outside in the form of
a policy directive mandating greater transparency, but the detailed
nuts-and-bolts implementation can be handled best by the agencies
themselves.

Proposed solutions also
need to address the dis­trust of one another's motives that
currently char­acterizes relations between government
estimating staffs and private estimators in accounting firms, think
tanks, and academia. In the view of one gov­ernment estimator,
"No one in the private sector seriously thinks that Joint Committee
or Treasury estimates are 'cooked.' What these guys really want is
the ability to estimate their own proposals-not to improve JCT or
Treasury estimates." Conversely, many private estimators are
concerned about the secrecy surrounding official estimates, which
they suspect masks inadequate analysis or questionable
assumptions.

Dealing with this
distrust will require more than mere changes in agency procedures.
An ongoing, meaningful, public-private dialog is needed. This in
turn will require a lessening of the isolation that separates
revenue estimators from the rest of the tax policy community. It
will also require real informational reciprocity in
pub­lic-private discussions of revenue estimates. Both sides
need to share information and calculations if trust is to be
established; transparency is not a one-way street.

Finally, we need to be
willing to accept incre­mental solutions to transparency
problems. Refer­ring to the 11 transparency components listed
earlier in this paper,[124] a leading revenue estima­tor in
private practice cautioned, "Perfection is the enemy of the good.
If we moved Treasury and the JCT to take the first five of these
[component] steps, and included descriptions of the
assump­tions and data in steps 6 and 7, we would achieve 98
percent of the goal."

Is Outside Intervention
Needed?

Most of the proposals
set forth below could be implemented promptly by the officials in
charge of the Treasury and Joint Tax Committee revenue estimating
staffs. Aside from the restrictions on disclosure of tax return
data, there are no stat­utes or regulations that bar Treasury
and the Joint Committee from becoming more open about their
revenue-estimating assumptions and procedures.

Despite these facts,
however, finding a solu­tion to the transparency problem cannot
simply be left to Treasury and the Joint Committee. Those two
agencies have had decades to come up with solutions since calls for
greater transpar­ency first arose. They have very largely
failed to do so. Clearly, outside policy direction is now
needed.

Why have Treasury and
the Joint Committee failed to resolve the transparency issues
discussed in this paper? The short answer is that transpar­ency
does not serve their short-term interests. All the internal
pressures and institutional barriers at both agencies are against
openness. As a Treasury official recently put it, "transparency
doesn't give any return to the Assistant Secretary [for Tax
Pol­icy]." So, he concluded, "nothing is going to hap­pen
on transparency without a mandate."

For example, greater
transparency would inev­itably delay the production of
estimates because extra time would be needed to assure that the
estimates and the underlying documentation could withstand public
scrutiny. This would aggravate complaints about delays in producing
estimates. Further, transparency would make it easier for outside
parties to criticize revenue esti­mates, and staff time would
be required to respond to those criticisms. The managers of the
Treasury and JCT estimating staffs have no desire to pile these new
burdens on the shoulders of already overworked staffers. It is
therefore unlikely that either Treasury or the JCT will enhance the
transparency of their revenue-esti­mating practices on their
own.

This section proposes a
few modest steps that should help to move Treasury and the Joint
Com­mittee along the road toward greater openness for their
revenue-estimating activities. If these propos­als fail to
produce results, more vigorous interven­tion may be needed, but
it is too early to assume failure. To the contrary, the appropriate
current starting point is to assume goodwill and an
intelli­gent response from both Treasury and the Joint
Committee.

A Few Modest
Proposals

The transparency
suggestions set forth below fall into two categories: "process"
proposals and "substance" proposals. Process proposals relate to
the rules and customs that govern the preparation of revenue
estimates. Substance proposals relate to the actual content of
estimates and the underly­ing data. Both types of suggestion
deserve careful consideration.

Process
Proposals

Enact Statutory
Disclosure Mandates.The disclosure mandates
in the Congressional Budget Act[125] and the Unfunded
Mandates Reform Act[126] have played a crucial role in
encouraging disclosure of the underpinnings of the cost estimates
prepared by the Congressional Budget Office. A similar
stat­utory mandate[127] addressed to Treasury and mod­eled
on the CBO disclosure mandates should be added to the Internal
Revenue Code.[128] A separate but substantially identical
mandate should be added to the provisions of the code that relate
to the Joint Committee on Taxation.[129]

These mandates would
make clear to both Trea­sury and the Joint Committee that
"disclosure is part of the job" of preparing revenue estimates and
that publication of a mere revenue number with­out any
explanation or rational underpinning rep­resents incomplete
work. These mandates would also provide a basis for requests from
both Trea­sury and the Joint Committee for the additional staff
and funding needed to make transparency a reality.

At the same time,
because these mandates would speak in general terms, Treasury and
the Joint Committee would remain free within rather broad limits,
as the CBO has been, to experiment with possible solutions to
transparency issues.

Statutory mandates are
important because they help to change the mindset of those who are
sub­ject to the mandate. At present, JCT estimators can regard
their job as "done" when they send an esti­mate to the
Congressman requesting it, and their counterparts at Treasury can
feel the same way when they have provided Treasury or White House
officials with revenue gain or loss figures. Understandable though
those attitudes may be, however, these mindsets leave the
information needs of the public out of account.

Mere exhortation is
unlikely to change these existing mindsets; the habits of thinking
that block disclosure are simply too ingrained.[130] That is why a
congressional command is needed to make it clear that the job of
preparing a revenue estimate is not completed until the public is
adequately informed.

The idea of using a
statutory mandate to encourage revenue-estimating transparency is
not new. Starting in 1988, Senator Robert W. Kasten, Jr. (R-WI),
began to champion his Tax Policy Free­dom of Information and
Sunshine Act.[131] Among other things, that legislation
would have required the Joint Committee on Taxation to report on
"the economic assumptions and methodology that underlie" its
revenue estimates. It would also have required preparation by the
Joint Committee of "technical explanations setting forth the
economic data, assumptions, and methodology [underlying a revenue
estimate] in sufficient detail to permit replications of the
results by nongovernmental analysts…."[132]

A similar, more recent
call for greater revenue-estimating transparency came on May 22,
2003, from Senators Max Baucus (D-MT) and Kent Con­rad (D-ND),
who outlined "five areas of concern" regarding the
revenue-estimating process in an open letter to the Joint Committee
on Taxation.[133] "We are concerned with the lack of
transparency in the revenue estimating process," the Senators said.
In addition, they called for enhanced quality controls over the
estimating process, greater time­liness in the production of
estimates, and better information about the relationship between
reve­nue yields and IRS enforcement efforts.

Publish
Assumptions.The assumptions on
which a revenue estimate is based-especially the behavioral
assumptions-can have an enormous impact on the resulting estimate.
Recall, for exam­ple, the furor that arose when, in 1990,
Treasury and the Joint Committee made somewhat different
assumptions about the likely taxpayer response to a change in
capital gains tax rates.[134] As one govern­ment revenue
estimator has put it, "The real differ­ences in revenue
estimates arise from the behavioral assumptions, which have a large
effect on some esti­mates and little or no effect on many
others."

The assumptions that
underlie revenue esti­mates should be released precisely
because they are so important in understanding and evaluating the
estimate. Indeed, publishing the assumptions on which estimates are
based is probably the single most important step that should be
taken to enhance the transparency of the federal revenue-estimating
process. Publication of assumptions will not, in itself, resolve
disputes about the valid­ity of the assumptions, but it is a
necessary first step to talking about and eventually resolving
those disputes.

Releasing estimators'
assumptions along with their estimates is a step that could be
taken volun­tarily, and almost immediately, by Treasury and the
Joint Committee. A change in internal directions and procedures is
all that is needed. Indeed, the Joint Committee made just such a
pledge in 1995.[135] The existence of that pledge shows that
release of the Joint Committee's estimating assump­tions is
feasible and is not barred by statute or rule. The situation at
Treasury appears to be similar.[136]

Releasing assumptions
would not involve ques­tions relating to the confidentiality of
tax returns and return information, except possibly in a few very
rare cases. In those rare instances, redaction could be used to
safeguard taxpayer data.

Requiring publication
of assumptions would impose an additional workload on the
estimators at both Treasury and the Joint Committee because neither
agency currently requires their estimators to document all the
estimates they produce. Today, in many cases, the assumptions that
underpin a revenue estimate either are not written down at all or
take the form of brief jottings for the file.

Further, even in those
cases in which assump­tions are formally documented internally,
the doc­umentation is often less detailed than would be
required if the assumptions were open to public scrutiny. Thus,
even when internal documentation is available, estimators'
workloads would probably increase modestly if their assumptions
were released to the public.

Another problem
involves the source and nature of the assumptions currently
employed in making revenue estimates. Sometimes, estimators rely on
private-sector data sources such as trade associa­tions that
would not want their assistance to be revealed when a revenue
estimate is released. Therefore, release of estimating assumptions
might constrict Treasury and Joint Committee access to data, at
least to some degree.

Further, all estimates
involve some degree of per­sonal judgment by the estimator. If
publication of estimators' assumptions were required, many
esti­mators would probably be reluctant to list "My best guess"
as the assumption underpinning an estimate.

This reluctance would
probably push estimators to base their assumptions on more than
guesses to the extent that this is possible. However, especially
when estimates must be produced under severe time pressure, it will
often be necessary to base estimates on assumptions that are little
more than educated guesses. Even in those cases, however, the
assumptions should be published. In most cases, it is more
important to know that an esti­mating assumption is based on a
guess than to know that it is based on rock-hard data.

Educated guessing is
required in all professional work, whether the work involves law,
medicine, engineering, or revenue estimating. However, even
educated guessing should have some basis, such as discussions with
industry experts or consideration of analogous behavioral effects.
When good pro­fessionals are required to guess, they normally
make that fact clear, together with the basis for their guess, so
that judges, patients, clients, and others can evaluate the
information provided. The same standard applies to revenue
estimators.

Explore User
Certifications.When govern­ment
agencies wish to spur private research that involves confidential
data, they often make use of data protection plans and "user
certifications" to preserve confidentiality while allowing research
to go forward. Subject to similar safeguards, both the Treasury
Department and the Joint Committee should consider providing access
to IRS statistics of income files to researchers in the private
sector, including the major accounting firms, universities and
nonprofit institutions, and others. This would provide a
substantial spur to in-depth research on the revenue-estimating
process.

The typical user
certification procedure involves the signing of data release
agreements by the researcher and the relevant government agency.[137] These agreements require preparation of
data pro­tection plans by researchers for agency approval.
Bonding, encryption procedures, and firewall certi­fications
can also be required. Surprise inspections can be used to enforce
the restrictions. In the case of tax data, researchers should be
made subject to the same civil and criminal penalties[138] that apply to IRS personnel who have
access to tax data.

Development of release
procedures such as this would enable Treasury and the Joint
Committee to commission private research on the
revenue-esti­mating process. Private contractors could also
assist in the task of model building and testing to facilitate and
support the work of Treasury and Joint Committee estimators.
Private contractors have sometimes assisted in this way in the
past,[139] and adoption of user certification
procedures could facilitate expanded use of their services in the
future.

There is a precedent
for the use of contract-based estimating data release procedures
such as those suggested above. When the Joint Committee on Taxation
established its first private-sector, rev­enue-estimating
advisory board in 1989, it required all board members to sign
"contracts strictly binding them to observe the confidentiality of
JCT taxpayer data."[140] The procedures sug­gested here are
simply a modern elaboration of that earlier approach.

Establish an IRS
Research Data Center.Many federal agencies
find themselves under the dual obligation of protecting personal
identities and information while at the same time releasing
infor­mation and statistics to the public. Treasury, the IRS,
and the JCT are not alone in facing these con­flicting demands.
However, other agencies, notably the Bureau of the Census,[141] Department of Health and Human
Services,[142] Department of Educa­tion,[143] and Bureau of Labor Statistics,[144] have done better than tax-related
agencies in devising creative solutions to their information
dilemmas.

Chief among these
responses has been the Research Data Center approach. A Research
Data Center (RDC) is a way to grant private researchers access to
confidential statistical data while carefully limiting the risk of
any disclosure of confidential information.[145] RDCs allow
licensed researchers to make use of confidential files (either on
site or over secure electronic lines) within a closely restricted
area of study using specialized equipment and extreme security. By
using an RDC, an agency can encourage research without breaching
legal and ethical restrictions on data disclosure.

The RDC approach offers
a way to resolve the problems caused by the increasing difficulty
of dis­closure-proofing the IRS public-use file. It also
provides a means of allowing sophisticated private researchers to
gain access to needed data, such as data relating to larger
corporations and multi-year longitudinal data, without jeopardizing
taxpayer privacy or confidentiality.

The RDC concept was
pioneered by the Census Bureau starting in 1994 through its Center
for Eco­nomic Studies. The success of the Bureau's pilot
projects led to the establishment of regional RDCs at several major
universities. That success also led other agencies, including the
National Center for Health Statistics and the Agency for Health
Care Research and Quality, to establish RDCs.

Access to an RDC by a
researcher is premised on compliance with a number of highly
restrictive conditions. These include submission of a research
proposal for approval; execution of a written agreement covering
the work to be done, the data to be used, and the types of output
allowed; limi­tations on the type of analysis allowed,
including use of any outside linkable data brought in by the
researcher; use of dedicated computers; review of output;
inspection of material removed from the site; and in-person
oversight by agency staff.

Adoption of the RDC
approach by the IRS would allow tax-related private research to go
for­ward in ways that are not now possible. The approach also
offers a partial solution to the increasing challenge of
disclosure-proofing the IRS public-use file and would permit
controlled release of large-firm corporate tax data to
research­ers even if inclusion of large-firm data in the IRS
public-use file is deemed impossible.

The RDC approach would
also permit Trea­sury, the IRS, and the JCT to subcontract to
pri­vate agencies some of the tax-related research projects
that at present can be performed only by agency staff due to
existing restrictions on access to tax data.

Imitate and Enhance CBO
Publication Prac­tices.From a theoretical
point of view, it might make sense to assign the tax estimators who
are now part of the Joint Committee staff to the Con­gressional
Budget Office;[146] but from an historical and political
point of view, a merger of this sort seems highly unlikely. The
Joint Committee has opposed the idea.[147] Moreover, such a move
would require agreement by the chairs of the Ways and Means,
Finance, and Budget Committees, and that is highly unlikely since
this move would alter the power relationships between these
individuals.

Nevertheless, it would
be possible to gain the transparency benefits of such a merger if
the Joint Committee were to imitate in toto the CBO's
publi­cation practices. This expansion of JCT disclosure should
apply to all revenue estimates prepared by the JCT staff, not just
the estimates with respect to chairman's marks, reported
legislation, House- and Senate-passed bills, conference reports,
and tax expenditures, all of which are now made available on the
Web by the JCT.[148]

Expanded JCT disclosure
of estimates would, of course, require a change in the JCT's custom
of permitting most revenue-estimate disclosure deci­sions to be
made by the individual Members of Congress who requested the
estimate.[149]

On the basis of similar
reasoning, the revenue-estimating staff at Treasury should publish
all of its revenue estimates within a reasonable time after the
estimates have been completed. Treasury's tax expenditure forecasts
are already made public in the Administration's annual budget.[150] Expanded publication of revenue
estimates would, of course, require enlargement of the existing
Treasury Office of Tax Analysis Web site.[151]

These suggestions are
not as far-fetched as they may seem because the CBO already
publishes on the CBO Web site selected tax estimates supplied by
the JCT.[152] However, what is currently
pub­lished provides little additional information aside from
the JCT estimate itself, with only a few accompanying details. The
scope of CBO publica­tion of JCT tax estimates needs to be
enhanced.[153]

A possible objection is
that release of the thou­sands of revenue estimates done each
year by the JCT and Treasury is unlikely to be useful to the
public. As a general matter, this is obviously true, just as (in a
different context) the current practice of releasing thousands of
IRS letter rulings each year is not useful to the general
public.

The alternative to
general release is to require publication of only "important"
revenue estimates, but who is to judge importance? Leaving this
judg­ment to agency administrators is not the right answer.
Every revenue estimate, just like every let­ter ruling, is of
interest to someone. Otherwise, the estimate would not exist. For
that reason, every revenue estimate should be made available to the
public, even though the number of interested indi­viduals may
not be large, just as the CBO makes every one of its cost estimates
publicly available.

Consider Peer Review
for Selected Estimates.Independent, objective
peer review is a very effec­tive way to improve the quality of
a study's meth­ods, results, and findings. Peer review is
commonly used to assure the quality of articles submitted for
publication in scholarly journals.[154] Increasingly, it is
also being applied in other areas, such as the federal regulatory
process.[155]

Selected revenue
estimates published by Trea­sury, the JCT, and the CBO should
be subjected to independent peer review. Given the estimating
workloads of these three agencies, it would be impractical to
subject every one of their estimates, or even the bulk of their
estimates, to review; but it would be highly useful to peer review
at least some of their estimates. The suggestions made during those
reviews would benefit the entire esti­mating process, not just
the estimates that are actually subjected to review.

Thought needs to be
given to the criteria that might be used to select estimates for
peer review. One criterion might be the uniqueness or novelty of
the estimating challenge, because peer review is especially needed
in cases in which estimating procedures are still in a somewhat
experimental stage. Another criterion might be the frequency with
which estimates in a particular area are chal­lenged by third
parties, because in those cases, peer review might help to resolve
or at least clar­ify the sources of dispute. Perhaps priority
ought to go to estimates relating to newly enacted tax provisions,
with the goal of standardizing the applicable estimating
techniques. In any event, some minimum number of peer reviews
should be done each year: for example, not less than five per
agency per year.

Peer reviewers would
necessarily require access to tax return data, and perhaps other
confidential information, to evaluate the quality of a revenue
estimate. This issue could be dealt with by requir­ing peer
reviewers to sign confidentiality agree­ments, as is commonly
done in other instances when the government requires outside advice
on confidential subjects.[156]

Peer review cannot be
allowed to delay submis­sion of revenue estimates to the
agencies request­ing them. Legislative time schedules will not
permit delay. Consequently, except in rare instances, peer review
of revenue estimates will have to be done after estimates have been
prepared and submitted to requesters rather than prior to
publication, as in the case of scholarly articles. The focus of the
review will therefore be on the improvement of future estimates
rather than on correction of the estimate at hand.

It is important to
assure the independence of the individuals who participate in a
peer review of agency revenue estimates. The three agencies that
prepare revenue estimates already conduct their own internal
reviews before releasing their esti­mates. An important
function of independent peer review is to overcome the suspicions
to which self-review inevitably gives rise, including fears that
self-reviewers might feel under pressure to support their agency's
position and to refrain from frank comment. Independent reviewers
can also provide a fresh look at old problems and can thus supply
insights that might not arise during self-review.

Independent peer
reviewers should include individuals from the private sector
(subject to safe­guards similar to those outlined above in
connec­tion with user mandates and research data centers). The
Government Accountability Office, the Congressional Budget Office,
the Congres­sional Research Service, and the National Academy
of Sciences could also provide peer reviewers for revenue
estimates.

When independent peer
review of selected reve­nue estimates occurs, there should be
an opportu­nity for public discussion and participation. At a
minimum, the reviewers should present a public report regarding
their findings, and the private sector should be given an
opportunity to ask ques­tions about that report.

Substance
Proposals

Publish Estimating
Memorandums.Publish­ing
revenue-estimating assumptions would be a good first step toward
greater transparency. How­ever, a more comprehensive and
satisfactory solu­tion would involve publication of more
extensive revenue-estimating technical memorandums, including
assumptions. At a minimum, technical memorandums should be prepared
and published for every significant estimate.

These technical
estimating memorandums should be modeled, in the case of routine
esti­mates, on the fiscal notes prepared by the revenue
departments of states such as Minnesota[157] or the cost estimates
published by the Congressional Budget Office.[158] For more
important estimates, the technical memorandums should be modeled on
those prepared by private-sector estimators for clients and on the
Joint Committee's rare but valu­able technical explanations,
such as its recent tech­nical explanation regarding dynamic
scoring of the President's 2003 tax proposals.[159]

The information in
technical memorandums should include a description of the rules of
thumb used by estimators to adjust the current-law base­lines
provided by the CBO or the Office of Manage­ment and Budget.
For example, the memorandums should describe how the JCT and
Treasury divide estimated current-law receipts by income class and
how the estimators move from adjusted gross income to imputed
income figures, such as the value of owner-occupied housing.
Knowing the rules of thumb used to resolve these nitty-gritty
issues can help the interested public understand why a given
estimate turned out as it did.

Estimating memorandums
would also be an appropriate place to describe the techniques used
by Treasury and Joint Committee estimators to extrapolate current
estimating data into periods five or 10 years in the future. These
extrapolations are needed when revenue estimates cover decade-long
future periods, as required by current budget rules, but the
extrapolation techniques used by Treasury and the JCT are largely
unknown.

Estimating memorandums
would also be an appropriate vehicle for providing basic
sensitivity analysis with respect to the point figures normally
provided in revenue estimates. A leading private-sector estimator
states:

I would argue that some
simple sensitivity analysis around [revenue-estimating] results
would be much more helpful than detailed information about the data
sources, assumptions, and modeling procedures that underlie an
estimate. Let's figure out a way to provide some meaningful
information about the potential range of results around a point
estimate. In addition, I'd like to know about the estimator's
relative comfort level with an estimate, on a one to five scale.[160]

Why are technical
memorandums outlining this information not routinely prepared and
released by Treasury and the Joint Committee, at least for
signif­icant revenue estimates? Personnel constraints
pro­vide one answer: More staff would be required to write the
required memorandums. Another answer doubtless involves political
considerations: Making more information public about a tax proposal
might provide the proposal's opponents with ammunition to mount a
critique.[161]

Neither of these
considerations constitutes a decisive objection to the proposal to
accompany Treasury and Joint Committee estimates with
tech­nical memorandums. A desire to suppress infor­mation
to gain political advantage, while perhaps understandable, is
inappropriate in a democracy. Responsible civil servants and their
superiors have a duty to request the staffing necessary to serve
the public properly.

Preparation and release
of revenue-estimating technical memorandums might actually be a
boon to morale on both the Treasury and Joint Commit­tee
estimating staffs. At present, staff members have no vehicle that
enables them to explain or justify their conclusions. This means
that they can easily be criticized without having a chance to
defend their work. Release of technical memoran­dums would
provide staff members with a means of defending themselves and
their conclusions.

As a first step, both
Treasury and the Joint Com­mittee should begin to accompany all
significant revenue estimates with a technical explanation that is
released to the public. At least at the outset, it should be left
to them to decide what constitutes "significance." In some cases,
revenue impact alone might determine an estimate's significance. In
other cases (such as the Joint Committee's release of its first
dynamic scoring), the novelty of the estimating approach might lend
significance to an estimate.

Once the Treasury and
Joint Committee staffs grow accustomed to preparing and releasing
tech­nical memorandums in significant cases, they can consider
whether abbreviated memorandums or fiscal notes would be useful to
them and to the public in additional cases, or perhaps in all
cases.

A gradualist approach
along these lines would enable revenue estimators to find out what
style of reporting would best serve the public. This would minimize
the dangers that one former Treasury estimator sees in required
estimating memoran­dums. "Publication of memorandums" he warns,
"raises the prospect that disclosure will result in non-meaningful
reports that have real costs but produce minimum benefit.
Compliance-oriented memos might appear to be addressing the
prob­lem, while serving only as window-dressing."

In addition to
preparing memorandums on spe­cific estimates, both Treasury and
the JCT should publish every three to five years a general
descrip­tion and overview outlining the status of their
rev­enue-estimating efforts. This overview should include a
discussion of any innovations that have been introduced, changes in
data sources, alter­ations in estimating techniques, challenges
faced, workloads, and problems yet to be resolved. The discussions
in the overview should relate to each of the major estimating
areas: individual, corpo­rate, payroll, excise, and estate and
gift. The goal should be to provide the interested public with a
periodic official update regarding the status of Treasury and JCT
revenue-estimating efforts.

Enhance the Public-Use
File.Private-sector revenue
estimating depends on the availability of tax data. For that
reason, it is important both to cor­rect the deficiencies in
the public-use tax file pre­pared by the IRS Statistics of
Income Division and to enhance that file in several ways. Unless
these improvements are made, private-sector revenue estimating will
not flourish and university research on revenue-estimating topics
cannot be undertaken.

Timeliness.First, and most
important, the IRS public-use file needs to be produced in a timely
way and released on a regular basis. In recent years, that has not
been the case. Two-to-three-year release delays have been common.[162] This has seriously hampered the work of
private revenue estimators.

As of early 2004, the
most recently released IRS public-use file related to the taxable
year 1999. Even longer delays have occurred with respect to earlier
years.[163] As a consequence, the information in
the public-use file is often outdated by the time it becomes
available to private estimators.

Much of the delay in
releasing public-use files has resulted from IRS concern about the
possibil­ity that private-sector operatives could glean
indi­vidual taxpayer data from the public-use file. These are
serious and legitimate concerns. How­ever, as outlined
earlier,[164] the IRS, with the help of private
contractors, has developed improved techniques to disclosure-proof
the public-use file. As a result, speedier release of the
public-use file should now be possible.[165]

Timeliness problems
could be somewhat ame­liorated if the Treasury and the JCT made
available their extrapolated files, which show their current and
future-year data extrapolated from prior-year figures. As one
private-sector estimator has put it, "I can easily get the
public-use file, but without a careful extrapolation it is not that
helpful, since the [tax] law and the underlying demographics change
over time." He states flatly that "Treasury and the JCT should make
available their extrapo­lated files."

If the public-use file
is to be published in a timely way, the release effort needs to be
ade­quately staffed. The goal should be to release the
public-use file contemporaneously with the statis­tics of
income file for the same year.[166]

Scope.The individual
public-use file should include basic classifiers, such as
information relat­ing to age distribution. In addition, it
should be expanded to include multi-year, longitudinal
infor­mation in light of the increasing importance of
lon­gitudinal files in the revenue-estimating
process.

In the case of business
returns, a public-use file relating to small and mid-size corporate
and non-corporate business returns should also be made available,
despite the obstacles outlined earlier,[167] with
confidentiality-preserving aggregation of the data. Small and
mid-size firms frequently play a disproportionately large role in
the formulation of tax policy, and a public-use business file
relating to those firms is therefore needed. Obviously,
prepa­ration and release of this file would require
addi­tional staffing in the IRS Statistics of Income
Division.

Disclosure-proofing
business return data for larger firms is probably impossible. To be
useful, a large-firm business return file would have to
iden­tify firms by industry, since many important
cor­porate tax rules vary from one industry to another. But if
industry identifiers were provided, it would be easy in many cases
to pick out individual firms. Hence, at least for larger
corporations, the Research Data Center approach described
ear­lier[168] is probably the only appropriate way to
permit private research on large corporate data to go
forward.

Competition as a
Driving Force for Change

The ideas suggested in
the preceding section may sound innocuous. They are intentionally
designed both to intrude as little as possible into the current
estimating work of Treasury and the JCT and to leave those agencies
largely free to devise their own ways of responding to the need for
greater transparency.

Nevertheless, some
government experts who have reviewed these suggestions in draft
form con­clude, in the words of one of them, that the
pre­ceding discussion "grossly underestimates the difficulty of
doing what is suggested" and "grossly overestimates the utility of
doing so." As to the utility of revenue-estimating transparency,
another government critic adds that transparency concerns are not a
priority. "Revenue estimating transpar­ency is not in the top
100 issues that concern tax policymakers," he states.

Comments such as these,
which are honestly advanced and deeply felt, show how unlikely it
is that Treasury or the Joint Committee will voluntar­ily
enhance their existing disclosure practices. Outside pressure will
almost certainly be needed to produce change.

Congress is a possible
source of outside pressure supporting greater transparency.
Congress is responsible for mandating the CBO's existing
trans­parency practices[169] and for changing the
rules of the House of Representatives to require the JCT to produce
dynamic scores.[170] Now and again, indi­vidual Members
of Congress have argued for greater revenue-estimating
transparency,[171] but there is no sign that Congress is
currently interested in trans­parency issues.

Private competition is
a more likely source of pressure for greater transparency. If
properly encouraged,[172] competition could become a driv­ing
force for improvement and change in the reve­nue-estimating
process.[173]

Recall, for example,
the 1989-1990 competi­tion between Treasury and the Joint
Committee over the assumptions and techniques to be used to
estimate the revenue effects of changes in capital gains taxes.
That competition forced both agencies to provide Congress and the
public with detailed explanations of the methods they used to
arrive at their numbers.[174] Recall, too, the competition between
advocates of static and dynamic scoring, which spurred the Joint
Committee estimators in 1995 to begin a serious investigation of
ways to produce a reliable dynamic score. More recently, there has
been dynamic scoring competition between the CBO and the JCT.[175] These various efforts culminated in the
2003 publication of the JCT's first full-scale dynamic score for a
tax pro­posal.[176] Competition was an effective spur to
action.

From whom might a
competitive critique of rev­enue estimates come? Certainly, in
the first instance, it might come from some of the major accounting
firms and their clients.[177] Would that critique be one-sided and
self-interested? In a few instances it might be, at least if
clients were allowed to insist on assertion of a predetermined
viewpoint; but this is not likely, and even self-interested
comments contain gems of wisdom. In general, however, the
professionals in accounting and law firms are fully capable of
providing high-quality, public-spirited commentary and are
will­ing to do so if given the opportunity.

Government agencies
other than the JCT and Treasury are another possible source of
comment regarding revenue estimates. Interested agencies might
include the Congressional Research Service, the Government
Accountability Office, and execu­tive branch departments
outside Treasury. All have the resources needed to provide
thoughtful cri­tiques of the estimating process.

Further, at least six
think tanks and research groups have developed an ability to
estimate broad-based individual income tax provisions that can be
simulated with a tax model using the IRS public-use file. As
outlined earlier,[178] these groups span the political
spectrum from left to right. If the information available to these
groups was enhanced in the ways outlined earlier, they would be
poised to make a significant contribution[179] to the debate
over the revenue-estimating process. Several universities would
also be able to contrib­ute to the debate.

However, these private
charitable and educa­tional groups currently operate on a
shoestring in most cases. To compete effectively with Treasury and
the JCT, they would have to find the money and staff to make modest
enlargements in their revenue-estimating staffs. The situation
seems made to order for demonstration projects lasting three-five
years, funded by private philanthropy.

After the three-five
year period, these groups could either convert their
revenue-estimating prowess into a self-supporting enterprise[180] or, if the ongoing need for their work
had been demon­strated, ask for continued foundation support.
In either event, their public-spirited competition, along with
similar competition from elsewhere in the private sector, would
push Treasury and the Joint Committee to improve their own
procedures and would provide examples of how to do that.

V. Conclusion: What Is
to Be Done?

Public-private
competition can lay the ground­work for changes in
revenue-estimating transpar­ency practices, but competition by
itself is unlikely to be the catalyst that is needed to get changes
underway. In the interim, in the words of one dis­tinguished
economist with both Treasury and pri­vate-sector tax
experience, "Treasury and JCT will stonewall, with perhaps a dose
of arrogance or hubris to boot."

One hopes that
prediction will not come true, but it might. If it does, an outside
catalyst will be needed to produce action on the transparency
issues discussed in this paper.

Congress is the most
likely catalyst. It can set the rules, not only for the JCT revenue
estimators, but also for those at Treasury. Further, as
men­tioned earlier,[181] individual Members of Con­gress,
including members of the tax-writing committees, have sometimes
expressed their unhappiness with the current lack of
revenue-estimating transparency. If a senior member of a
tax-writing committee became consistently inter­ested in
transparency issues, change would occur sooner rather than
later.

Alternatively, a "Blue
Ribbon Commission" sponsored by a government agency, nonprofit
group, or accounting or law firm might get the ball rolling,
especially if it included some of the indi­viduals who lived
through the revenue-estimating wars of the 1980s and 1990s. Many of
them now occupy senior positions in both government and the private
sector, and if the commission included at least some of those
individuals, it might have the influence required to produce
change.

One thing is sure:
Change is needed in the reve­nue-estimating transparency
practices at both Treasury and the JCT. The current secrecy aids no
one. The agencies themselves, the professions, and the public would
all benefit from greater openness. Given these facts, change is
desirable and perhaps inevitable, even though it is not now
possible to outline the circumstances that will produce
it.

Thomas F. Field is
the founder of Tax Analysts, a nonprofit publisher located in
Arlington, Virginia. This paper is based on interviews with scores
of individuals, both in and outside of government. Most asked not
to be identified, but the author wishes to thank each of them for
their assistance. Their comments helped to correct errors and
substantially improved the recom­mendations. Thanks to these
comments, this paper has truly become a collective effort by dozens
of individu­als who share a common interest in the improvement
of the estimating process. Any errors, however, are the author's
own.

[1]The relevant
spending legislation, enacted starting in 1974, required revenue
neutrality for tax legislation and imposed annual caps on
discretionary spending. Revenue estimates played a crucial role in
calculating the tax-revenue neutrality required by the Acts. The
most important of these statutes were the Congressional Budget and
Impoundment Control Act of 1974, P.L. 93-344, 88 Stat. 297; the
Balanced Budget and Emergency Deficit Control Act of 1985, P.L.
99-177, 99 Stat. 1038 (commonly known as the Gramm-Rudman-Hollings
Act); and the Budget Enforcement Act of 1990, P.L. 101-508, Title
XIII, 104 Stat. 1388-573 (1990).

[2]The Congressional
Joint Committee on Taxation, after careful study, has produced
revenue estimates that successfully take into account the feedback
effects of major tax proposals on budget aggregates (dynamic
scoring). In addition, the Treasury Department has made significant
improvements in the distributional analysis of tax proposals
(although, regret­tably, it has not made much use of those
improvements). These developments are discussed later in this
paper.

[3]These issues
include dynamic scoring (discussed in a separate paper in this
series); the truncation of the estimating time horizon (by
restricting estimates to periods of five years or 10 years), which
makes it difficult to deal with issues such as retirement savings
and depreciation; the possibility of using accrual and
present-value accounting when making esti­mates; the need to
account for the interest costs associated with tax changes; and
questions relating to probabilistic scor­ing. Another issue
requiring attention relates to sensitivity analysis and the
provision of range estimates in addition to point estimates. As a
leading private-sector estimator has put it, "I would gladly trade
off knowing the gory details of an estimating model for a sense of
the professional judgments about the reasonable range of
possibilities around an esti­mate." Cost/benefit analysis and
inclusion of compliance costs in revenue estimates also require
consideration. In the words of a second private-sector economist,
"If Treasury and JCT provided a benefit/cost analysis, including
compliance costs, in their estimates, then the economists on the
revenue-estimating staffs would be used to their fullest potential
and public policy would be debated on the basis of more complete
information. I would be willing to exchange 1000 simple revenue
estimates," he continued, "for 20 good benefit/cost analyses of
existing and proposed tax provisions."

[4]A description of
the Treasury's Office of Tax Analysis is available on the Web at
www.treas.gov/offices/tax-policy/offices/
ota.shtml.

[8]See Chart 1750 in
The Tax Directory. A description of the CBO's staffing and
organization is available on the Web at
www.cbo.gov/Organization.cfm;the Mission of the
Congressional Budget Office is described at
www.cbo.gov/Mission.cfm; and a description of "CBO's
Policies for Preparing and Distributing Its Estimates and Analyses"
appears at www.cbo.gov/
Policies.cfm.

[9]Publication of the
IRS Statistics of Income is authorized by Internal Revenue Code, 26
U.S.C. Sec. 6108(a).

[10]A 1991 article by
Emil M. Sunley, a former Deputy Assistant Secretary for Tax Policy
at Treasury, and Randall D. Weiss, a former Deputy Chief of Staff
at the Joint Committee on Taxation, warns that "there are severe
limitations on the ability of anyone to make an ex post judgment on
the accuracy of [revenue] estimates." However, the article also
states that "Although most estimates probably cannot be checked
easily, some can." See Emil M. Sunley and Randall S. Weiss, "The
Revenue Estimating Process," Tax Notes, June 10, 1991, p.
1306. The Sunley-Weiss article also appeared in the American
Journal of Tax Policy, Vol. X, No. 2 (Fall 1992). On May 18,
1995, in letters to the Chairmen of the House Ways and Means
Committee and Senate Finance Committee, Joint Committee Chairman
Kenneth J. Kies stated that the Joint Committee would begin to
undertake retrospective analyses of revenue estimates in selected
cases. See the discussion in the text accompanying note 50,
infra, regarding the Joint Committee's transparency efforts
and Tax Notes Today, May 18, 1995, Doc 95-5074, 95 TNT
98-25 (Ways and Means Committee letter) and Doc 95-5075, 95
TNT 98-26 (Finance Committee letter).

[11]For an overview of
distributional analysis at Treasury, the Joint Committee on
Taxation, and the Congressional Budget Office, see David F.
Bradford, ed., The Distributional Analysis of Tax Policy
(Washington, D.C.: American Enterprise Insti­tute Press, 1995).
For an update of the Bradford book's account of Treasury
distributional practices, see OTA Paper 85, described in the
text accompanying note 18, infra.

[12]The Congressional
Budget and Impoundment Control Act, note 1, supra, directs
the Congressional Budget Office (CBO) to prepare "for each bill or
resolution of a public character reported by any committee of the
House of Representatives or the Senate…an estimate of the
costs which would be incurred in carrying out such bill or
resolution…together with the basis for each such
estimate." See 2 U.S.C. Sec. 653 (emphasis added). The CBO
interprets the italicized words to require disclosure of both the
"critical assumptions" and the "analytic methodologies" used to
prepare its estimates. (The quoted phrases appear in the disclosure
discussion under "CBO's Statutory Responsibilities" in "CBO's
Policies for Preparing and Distributing Its Estimates and Analyses"
at www.cbo.gov/Policies.cfm). A similar disclosure mandate
is set forth in the Unfunded Mandates Reform Act of 1995, P.L.
104-4, 109 Stat. 48. The applicable legislation also mandates broad
public disclosure of data obtained by the CBO from other agencies,
including executive branch departments and congressional agencies
such as the Government Accountability Office (formerly U.S. General
Accounting Office) and the Comptroller General. This disclosure
directive is codified as 2 U.S.C. Sec. 603, Subsection (a) of which
provides as follows: "Except as provided in subsections (c), (d),
and (e) of this section [relating to data exempted from disclosure
on national defense and other grounds], the Director shall make all
information, data, estimates, and statistics obtained under section
601(d) and (e) of this title [relating to executive branch and
congressional agencies] available for public copying during normal
business hours, subject to reasonable rules and regulations, and
shall to the extent practicable, at the request of any per­son,
furnish a copy of any such information, data, estimates, or
statistics upon payment by such person of the cost of making and
furnishing such copy." Section 603(b) of the Act adds a requirement
that the CBO prepare a publicly avail­able data
index.

[13]See Sunley and
Weiss, "The Revenue Estimating Process." Two earlier articles by a
former estimator also describe the Trea­sury revenue-estimating
process. See Howard W. Nester, "Interpreting Revenue Estimates:
Macro-Static/Micro-Dynamic," National Tax Association, 1986
Conference Proceedings, p. 208, and "The April Surprise,"
National Tax Association, 1989 Conference Proceedings, p.
157. Other descriptive articles from Treasury staff are listed in
the text accompanying note 18 and in notes 20, 29, 39, and 40,
infra. See also Bradford, ed., The Distributional
Analysis of Tax Policy. A recent article from OTA staff members
contains detailed revenue estimates but only a limited description
of how they were produced. See Donald Kiefer, Robert Carroll, Janet
Holtzblatt, Allen Lerman, Janet McCubbin, David Richardson, and
Jerry Tempalski, "The Economic Growth and Tax Relief Reconciliation
Act of 2001: Overview and Assessment of Effects on Taxpayers,"
National Tax Journal, Vol. 55 (March 2002), pp.
89-117.

[14]Treasury provides
extensive job orientation to new revenue estimators. The "Revenue
Estimating Handbook" is a small part of a larger on-the-job
training program.

[18]Most OTA
Papers, including the two mentioned in this paragraph, are
available on the Web at www.treas.gov/offices/
tax-policy/library/otapapers/index.html.

[19]Martin A.
Sullivan, "The Decline and Fall of Distribution Analysis," Tax
Notes, June 30, 2003, p. 1869. Sullivan argues (p. 1872) that
"conservatives in the executive and legislative branches have been
quietly snuffing the life out of analysis that examines tax bills'
effects on the tax burdens of the poor relative to the rich."
Sullivan's analysis became the basis for an outspoken op-ed article
by Paul Krugman that appeared in The New York Times, August
5, 2003, p. A15. However, the Sullivan-Krugman charges are hotly
disputed by Treasury officials in the current Bush Administration,
who claim that Treasury continues to make vigorous use of
distributional analyses. Both sides may be right. Perhaps Treasury
continues to prepare distributional analyses, as officials contend;
but, if so, it refrains from making them available to the public,
as Sullivan and Krugman point out. For a response to Krugman from
Andrew B. Lyon, former Deputy Assistant Secretary of the Treasury
(Tax Analysis), see "Taxes and Politics," The New York
Times, August 9, 2003, p. A10.

[20]See "Compendium of
Tax Research 1987," Tax Notes Today, January 1, 1988, Doc
88-952, 88 TNT 20-7. Among the 11 articles included in the
compendium are "A Guide to Interpreting the Dynamic Elements of
Revenue Estimates," by Howard W. Nester; "The Treasury Income Tax
Simulation Model," by James M. Cilke and Roy A. Wyscarver; "Family
Eco­nomic Income and Other Income Concepts Used in Analyzing
Tax Reform," by Susan C. Nelson; "Tabulations from the Treasury Tax
Reform Data Base," by James R. Nunns; and "The Treasury
Depreciation Model," by Geraldine Gerardi, Hudson Milner, Leslie
Whitaker, and Roy A. Wyscarver.

[22]The Tax Analysts'
Freedom of Information Act (FOIA) request was made in a letter to
Treasury dated March 4, 2003. Tax Notes Today, March 4,
2003, Doc 2003-6918, 2003 TNT 52-12. The letter requested
"output files or printouts" from Trea­sury's individual income
and corporate tax computer simulation models, plus "any
spreadsheets summarizing the data…or making off-model
adjustments to the output…." In April 2003, Tax Analysts
requested and was granted expe­dited processing of its March 4,
2003, request. As of September 2004, Treasury has not responded to
the March 2003 request, citing its FOIA workload as the reason for
the delay. (Only one Treasury attorney processes tax-related FOIA
requests, and she has other duties in addition to consideration of
FOIA issues.)

[23]President George
W. Bush announced his dividend exclusion proposal on January 7,
2003, as part of a broader tax pack­age. See Tax Notes
Today, January 7, 2003, Doc 2003-565, 2003 TNT 5-25. The
accompanying Treasury press release stated that the President's
exclusion plan would decrease revenues by $364 billion during the
fiscal years 2003-2013. Tax Notes Today, January 7, 2003,
Doc 2003-833, 2003 TNT 5-20.

[25]Background
information regarding the Joint Committee revenue-estimation
process is provided in Part IV of the Joint Committee History
& Background, which is available on the Web at
www.house.gov/jct/revhist.htm.

[28]Joint Committee on
Taxation, Explanation of Methodology Used to Estimate Proposals
Affecting the Taxation of Income from Capital Gains,JCS-12-90,
March 27, 1990, in Tax Notes Today, March 27, 1990, Doc
90-2432, 90 TNT 67-8.

[29]See Gerald E.
Auten, Leonard E. Burman, and William C. Randolph, "Estimation and
Interpretation of Capital Gains Realization Behavior: Evidence from
Panel Data"; Robert Gillingham, John S. Greenlees, and Kimberly D.
Zieschang, "New Estimates of Capital Gains Realization Behavior:
Evidence from Pooled Cross-Section Data"; and Jonathan D. Jones,
"An Analysis of Aggregate Time Series Capital Gains Equations," all
of which are available on the Office of Tax Analysis Web site at
www.treas.gov/offices/tax-policy/library/otapapers/otapapers80-93.shtml.

[33]The table, using
the JCT's new distributional techniques related to the revenue
provisions of the Omnibus Budget Recon­ciliation Act of 1993,
appeared as footnote 17 in Joint Committee on Taxation,
Estimated Budget Effects of the Revenue Pro­visions of H.R.
2264 (the Omnibus Budget Reconciliation Act of 1993) as Agreed to
by the Conferees,JCX-11-93, August 4, 1993, in Tax Notes
Today, August 4, 1993, Doc 93-8497, 93 TNT
164-7.

[34]A chart indicating
the number of JCT distributional estimates produced each year since
1989 appears in Martin Sullivan, "The Decline and Fall of
Distribution Analysis," Tax Notes, June 30, 2003, pp.
1869-1873.

[35]Testimony of the
Staff of the Joint Committee on Taxation at a Hearing of the
Subcommittee on Oversight of the House Committee on Ways and Means
Concerning Modeling the Economic Effects of Changes in Tax
Policy, JCX-36-02, May 6,
2002, in Tax Notes Today, May 7, 2002, Doc 2002-10877,
2002 TNT 89-8.

[37]The rules of the
House of Representatives that define the process of dynamic scoring
are summarized in Overview of Work of the Staff of the Joint
Committee on Taxation to Model the Macroeconomic Effects of
Proposed Tax Legislation to Comply with House Rule
XIII.3.(h)(2), JCX-105-03, December 22, 2003, Section I(A) and
note 3, in Tax Notes Today, December 22, 2003, Doc
2003-26926, 2003 TNT 246-8.

[38]Examples of
typical behavioral effects that have traditionally been considered
by Treasury and the JCT include the effects of changes in capital
gains tax rates on gains realizations and the effects of IRA
changes on the account "take-up rate." For other examples, see
Gerald Auten and Robert Carroll, "The Effect of Income Taxes on
Household Income," The Review of Economics and Statistics,
Vol. 81, No. 4 (1999), pp. 681-693.

[39]An early
discussion of how and when to take macroeconomic feedback effects
into account is contained in the Appendix to the August 17, 1978,
Senate Finance Committee testimony by Treasury Secretary W. Michael
Blumenthal regarding H.R. 13511, the Revenue Act of 1978. This
nine-page Appendix is available as Doc 78-7133 through the
Tax Analysts Document Service at 800-955-3444. With respect
to the effect of tax changes on economic capacity and long-run
bud­getary figures, the Appendix concludes that "As research
sheds more light on the nature of these effects, it may be
possi­ble to incorporate them more formally into longer-run
projections." As it turned out, it took 25 years before the first
full-blown macroeconomic scoring appeared. See note 47,
infra.

[40]For example, in
1981, Northwestern University Economist Robert Eisner prepared two
Treasury OTA Papers with Robert S. Chirinko in which the
authors compared investment equations for different macroeconomic
models. They basically concluded that, by choosing one's model
carefully, large macroeconomic effects could be produced for tax
changes relat­ing to such matters as depreciation. See Robert
S. Chirinko and Robert Eisner, "The Effects of Tax Policies on
Investment in Macroeconometric Models: Full Model Simulations,"
OTA Paper 46, January 1981, and "The Effects of Tax
Parameters on the Investment Equations in Macroeconomic Econometric
Models," OTA Paper 47, January 1981. OTA Papers are
available on the Web at
www.treas.gov/offices/tax-policy/library/otapapers/otapapers80-93.shtml.

[47]Macroeconomic
Analysis of H.R. 2, the "Jobs Growth Reconciliation Tax Act of
2003" Prepared by the Staff of the Joint Committee on
Taxation, Congressional
Record, May 8, 2003, pp. H3829-H3832.

[48]Rules of the House
of Representatives, 108th Congress,
January 7, 2003, p. 25. Rule XIII.3(h)(2)(A) provides that "it
shall not be in order to consider a bill or joint resolution
reported by the Committee on Ways and Means" unless the report on
the bill includes either "an analysis of the macroeconomic impact"
of the bill or an explanation "why such an analysis is not
calculable."

[49]Overview of Work
of the Staff of the Joint Committee on Taxation to Model the
Macroeconomic Effects of Proposed Tax Legislation to Comply with
House Rule XII.3.(h)(2),JCX-105-03,
December 22, 2003, in Tax Notes Today, December 22, 2003,
Doc 2003-26926, 2003 TNT 246-8.

[52]See "The Revenue
Estimating Process-Letting in the Light and Letting Out the Hot
Air," Tax Notes, October 16, 1995, p. 373.

[53]This is made clear
in the discussion of "Administrative Procedures" in Part II(A)(5)
of Joint Committee on Taxation, Dis­cussion of Revenue
Estimation Methodology and Process, August 13, 1992, which
states that "Requests for revenue estimates of legislative
proposals are treated as confidential correspondence. Generally,
revenue estimates are released only to the Member making the
request. Therefore, the estimate remains confidential unless the
Member decides to make the esti­mate public."

[54]The Ways and Means
Committee press release announcing formation of this panel is
available in Tax Notes Today, April 28, 1989, as Doc
89-3089, 89 TNT 88-2. Brief biographical sketches of the six
Advisory Board members are available as Doc 89-3231 through
the Tax Analysts Document Service at 800-955-3444.

[55]See Overview of
Work of the Staff of the Joint Committee on Taxation to Model the
Macroeconomic Effects of Proposed Tax Legisla­tion to Comply
with House Rule XII.3.(h)(2) (JCX-105-03), December 22, 2003,
pp. 15-22.

[56]The models used in
the 1996-1997 exercise, together with the proposals and results of
the Joint Committee's effort, are summarized in Joint Committee
on Taxation Tax Modeling Project and 1997 Tax Symposium Papers,
JCS-21-97, November 20, 1997. This report was published in three
parts as Doc 97-31764 in Tax Notes Today, November
20, 1997, 97 TNT 227- 41 (Part 1), 97 TNT 227-42 (Part
2), and 97 TNT 227-43 (Part 3).

[58]At present, this
practice is merely customary and is not required by any statute or
rule. It is described in part II(A)(5) of Joint Committee on
Taxation, Discussion of Revenue Estimating Methodology and
Process.

[59]Over the years,
JCT reports and press releases on the revenue-estimating process
have cataloged the increasing number of requests for JCT revenue
estimates, which have grown steadily from less than 1,000 per year
in the 1970s and 1980s to nearly 5,000 per year today. (Although no
figures are available, the number of requests for Treasury
estimates has doubt­less grown too.) Delay is a result of this
growth, which is caused by an excess of supply over demand. In
economic terms, this excess is inevitable (given the current rules
for requesting estimates) for three reasons. First, those asking
for revenue estimates (executive branch officials and Members of
Congress) face a zero price (revenue estimates are free), so demand
is unlimited. Second, there is a real cost (staff time and
resources) to preparing revenue estimates, and this restricts
sup­ply. Third, policymakers in the executive branch and
Congress realize that honest revenue and cost estimates can "clip
their wings" when they propose tax-cutting and spending plans and
are therefore reluctant to increase the supply of rev­enue and
cost estimates by authorizing the money needed to hire more
estimators. As the mayor of London has proven in the case of
vehicular access to public streets, the solution to this
supply-demand problem is obvious: One must "charge" executive
branch officials and Members of Congress in some fashion for
revenue estimates (institute a quota system, impose an increasing
"delay sanction" as the number of requests increases, or the like).
Revenue estimators are good economists, and demand-supply problems
are their bailiwick; a solution to the overload and delay problem
therefore ought to be possible.

[60]One private-sector
revenue estimator routinely advises his clients that their chances
of having an impact on official scor­ing are greater if a
client's analysis is provided before an official score is
prepared. Lobbyists may sometimes submit a com­peting revenue
estimate after an official score has been released, he says, but
this approach generally has little effect on official
estimates.

[61]Sections 8001-8023
of the Internal Revenue Code, which authorize establishment of the
JCT and set forth its powers and duties, do not mention revenue
estimating. The JCT's authority to engage in revenue estimating
appears to derive from its generalized duty to "report, from time
to time…the results of its investigations…." See,
specifically, Internal Revenue Code, Section 8022(3)(A).

[64]At present, the
Joint Committee publishes revenue estimates that relate to
chairman's marks, reported legislation, House- and Senate-passed
bills, conference reports, and tax expenditures. To obtain these
estimates, the reader can go to the JCT Web site at
www.house.gov/jct/, click on "continue," access JCT
Publications by year, and then search for JCX Documents relating to
"estimated revenue effects." However, the JCT does not publish the
far more numerous revenue estimates it prepares in response to
requests from individual Members of Congress, even after
legislation based on those estimates is introduced. Nor do its
published estimates generally describe either how the estimates
were done or the assumptions on which they were based. In addition
to the JCT, the CBO publishes selected JCT revenue estimates. See,
for example, the revenue estimate relating to H.R. 3971, the
Highway Reauthorization Tax Act of 2004, on the CBO Web site at
www.cbo.gov/showdoc.cfm?index=5257&sequence=0
.

[65]Now and then, the
JCT has indicated a desire to fight its way free of such pressures.
See the text accompanying note 50, supra.

[67]The CBO's
Policies for Preparing and Distributing Its Estimates and
Analyses are available on the Web at
www.cbo.gov/Poli­cies.cfm. They provide in pertinent
part that "Both the Congressional Budget Act and the Unfunded
Mandates Reform Act direct CBO to disclose the basis for each
budget and mandate cost estimate. CBO interprets that directive to
include the disclosure of the critical assumptions and analytic
methodologies used to prepare the estimate. All written cost
estimates include explanations of the basis of the estimate, and
CBO supplies further details on request."

[68]However, the CBO
does not supply "further details" with respect to the selected JCT
revenue estimates that it publishes on the Web. For a discussion of
this limitation, see note 153, infra.

[69]See 2 U.S.C. Sec.
601(f). This provision originated in 1985 when Ways and Means
Committee Chairman Dan Rosten­kowski and Joint Committee Chief
of Staff David Brockway became nervous about possible encroachment
by the Con­gressional Budget Office on the traditional
prerogatives of the Joint Committee and the tax-writing committees
of Congress. According to a participant in the development of the
legislation, there had been "little turf battles" over
esti­mates dealing with tax-related topics such as
depreciation. To prevent such "scrambles," Brockway wanted to
solidify the JCT's authority over the revenue-estimating process.
According to observers, enactment of legislation confirming the
JCT's role in the revenue-estimating area was readily acquiesced in
by Rudolph G. Penner, who then headed the CBO, because Penner
regarded the legislation as merely ratifying the status quo.
However, Penner's staff was dismayed, and Brockway reportedly
regarded the legislation's enactment as a significant
victory.

[71]The CBO paper is
available on the Web at
www.cbo.gov/ftpdoc.cfm?index=4454&type=1.

[72]In addition to
reports, analyses, and baseline economic forecasting work, the
Congressional Budget Office is required to develop a cost estimate
for virtually every bill reported by a congressional committee
(other than bills involving income, excise, payroll, and estate and
gift taxes, which are estimated by the JCT). It also prepares
estimates for bills in the early stages of drafting. In addition,
it prepares cost and revenue estimates for tariff proposals,
offsets, and user fee proposals.

[74]Documentation of
estimates relating to major legislation is obviously important for
a variety of reasons, including internal review, but the time
pressures encountered when preparing major legislation commonly
make it difficult to prepare ade­quate documentation. This is
another instance in which adequate staffing would improve the
estimating process.

[75]According to
present and former estimators interviewed for this paper, some
estimators routinely prepare fairly detailed documentation, while
others are less thorough. Workloads also affect the amount of
documentation that can be prepared. As mentioned in note 74, when
workloads are heavy, documentation suffers.

[76]Publication of
regulatory rules in the Federal Register is required by 5
U.S.C. Sec. 552(a)(1).

[77]Contrary to the
suggestion in the text, a Treasury source states that more than 60
years ago, one of PricewaterhouseCoo­pers' predecessor firms
provided a critique of Treasury revenue estimates with respect to a
then-current proposal to inte­grate the corporate and personal
income taxes. That proposal evolved during congressional
consideration of what became the Personal Holding Company Tax and
the Accumulated Earnings Tax. For further information, see the Tax
History Project Web site at www.taxhistory.org.

[78]KPMG and Deloitte
& Touche no longer have formal revenue-estimating staffs, but
both PricewaterhouseCoopers and Ernst & Young do.

[79]A group such as
the Joint Committee's Blue Ribbon Advisory Panel could perform this
function, but-as explained earlier in the text accompanying note
55-that group has not been very active. Moreover, when the panel
has met, it has focused entirely on questions relating to dynamic
revenue estimating rather than on improvement of the normal
revenue-estimat­ing process. In addition, to be effective in an
oversight role, the panel would need considerably more access to
informa­tion than it currently has.

[80]The IRS has become
particularly adept at discontinuing or renaming documents that it
has been ordered to reveal, thus avoiding court mandates under the
Freedom of Information Act. Examples of discontinued or renamed
documents include General Counsel Memorandums (replaced by secret
Legal Memorandums) and Technical Advice Memorandums (replaced by
secret Field Service Advice memorandums [FSAs], which, in turn,
were discontinued in favor of other forms of secret guidance when
the courts ruled that FSAs must be made public). For a discussion
of the discontinuance-renam­ing issue, see Tax Analysts v.
Internal Revenue Service, 326 U.S. App. D.C. 53, 117 F3d 607,
at 616 (D.C. Cir. 1997).

[81]For example,
according to Bernard A. Schmitt, the Joint Tax Committee's Deputy
Chief of Staff and long-time director of the committee's
revenue-estimating activities, the physical location of the Joint
Committee's revenue estimators in a build­ing isolated from
Congress and the rest of the JCT staff was chosen to insulate the
estimators from partisan pressures. See "Need a Revenue Estimate?
JCT Officials Demystify the Estimating Process," Tax Notes,
May 1, 1989, p. 523. (Space pres­sures in the Longworth House
Office Building are another obvious reason for locating the JCT
estimators elsewhere, as is the desire to facilitate coordination
with the Congressional Budget Office, whose staff is currently
located near the JCT estimators.)

[82]However, secrecy
can have adverse consequences for the tax policy process. As one
former Treasury revenue estimator has put it, "The desire to
isolate the revenue estimating staff from the political process has
resulted…in non-participation by the estimating staffs in
meaningful tax policy discussions, including discussions that might
lead to improvement of estimating data, methodology, and modeling.
More frequent public discussion of the revenue estimating process
would be likely to result in improvements in the estimators'
methodologies and modeling, since by its nature economics is a
'social,' not a private science."

[83]According to
anecdotal evidence from a small number of former estimators,
Treasury and Joint Committee estimators have, in rare instances,
been required by political pressures to accept assumptions or
estimates with which they did not agree. As a former estimator put
it, "Due to the secrecy, we don't know the extent to which the
[revenue-estimating] pro­cess has already been politicized. We
trust that the current revenue estimating staffs are acting as true
professionals, which I believe they are, but when was the last time
a revenue estimator publicly resigned to protect his or her
indepen­dence from political interference?"

[84]Note, for example,
the comments by former CBO Director Rudolph G. Penner in the text
accompanying note 70, supra.

[85]The CBO's policies
are available on the Web at
www.cbo.gov/Policies.cfm.

[86]At present,
Treasury's estimating baseline is updated every two months to take
into account recent economic develop­ments. Crucial estimates
regarding pending legislative proposals may therefore be updated
again and again throughout the year as the baseline
changes.

[87]Joint Committee
representatives have stated in recent speeches that the committee
receives nearly 5,000 requests a year for estimates. If all of
these were answered, the committee would find itself processing an
average of 20 responses each work day, which would constitute a
truly extraordinary workload. The actual number of estimates
prepared by the Joint Committee in response to requests must
therefore be significantly less than 5,000. Treasury does not
tabulate estimating requests or responses, but an official familiar
with Treasury's estimating activities states that the number of
estimates pre­pared each year has "gotta be in the
thousands."

[88]Section
7213(a)(1)-(3) of the Internal Revenue Code imposes a fine of up to
$5,000, imprisonment for up to five years, or both for unauthorized
disclosure of tax return information. In addition, Sections 7431
and 7435 provide civil damages for unauthorized tax information
disclosures.

[89]Release of
statistical material such as the public-use file is authorized by
Section 6103(b)(2) of the Internal Revenue Code, which states that
the term "return information" does not include "data in a form
which cannot be associated with, or otherwise identify, directly or
indirectly, a particular taxpayer."

[90]Since 1995,
according to the IRS, release of the public-use file has occurred,
on average, about 32 months after the close of the filing period
for a given taxable year. For example, public-use file data for
1999 did not become available until Feb­ruary 2003-26 months
after the close of the filing period. The public file release dates
and delays for earlier taxable years are as follows: 1998,
September 2002-33 months delay; 1997, February 2002-38 months
delay; 1996, February 2001-38 months delay; and 1995, April 1999-27
months delay. In contrast, statistics of income data for a given
tax­able year become available about six months after the close
of the filing period for that year. For example, according to the
IRS, statistics of income data for the taxable year 1999 became
available in June 2001-about six months after the close of the
filing period.

[91]But perhaps the
science now outweighs the art. According to former Joint Committee
Chief of Staff Ronald A. Pearlman, "It has been said that revenue
estimating is as much an art as it is a science. Certainly all
would agree that it is not an exact science. But economic theory
and econometric methods are much more sophisticated than most of us
realize. Revenue estimating assuredly is much more than an art."
See the "Conclusion" in Section VI of Joint Committee on Taxation,
State­ment of Ronald A. Pearlman, Chief of Staff, Joint
Committee on Taxation, Before the Senate Committee on Finance
(JCX-3-89), March 14, 1989, in Tax Notes Today, March 14,
1989, Doc 89-2024, 89 TNT 59-10.

[92]Empirical evidence
about behavioral responses can grow over time. For example,
assumptions about the likely behavioral changes induced by a change
in capital gains tax rates have differed quite widely in the past.
See the discussion in the text accompanying note 26, supra,
regarding the 1989-1990 dispute between Treasury and Joint
Committee estimators over the likely behavioral effects of the
gains tax changes proposed in that year. Since that time, however,
Congress has varied gains tax rates with such frequency that there
is now a firmer empirical basis for estimating the behavioral
effects of such changes. For a further discussion of the capital
gains issue, see Section III(B)(1) of Joint Committee on Taxation,
Method­ology and Issues in the Revenue Estimating
Process, JCX-2-95, January 23, 1995, Section V, in Tax Notes
Today, January 23, 1995, Doc 95-1118, 95 TNT
15-15.

[93]However, there was
vigorous internal debate among the revenue estimators themselves,
according to government observ­ers active in the estimating
process at the time, and vigorous internal debate continues to
characterize the process.

[94]The full text of
the conference summary is set forth in Tax Notes, June 27,
1988, starting at p. 1581. Brockway's com­ments appear at p.
1582. For similar sentiments expressed by Treasury, see the third
bullet in the quoted text accompany­ing note 17,
supra.

[97]The National
Association of State Budget Officers counts 24 states as using some
form of "consensus forecasting." See Table G in National
Association of State Budget Officers, Budget Processes in the
States, January 2002, pp. 19-21. See also Table 7.35, "Revenue
Estimating Practices," in Council of State Governments, The Book
of the States, 2003, p. 394.

[98]The origins of the
consensus revenue-estimating process are obscure. Florida appears
to have been the first state to make use of a full-blown consensus
estimating approach. Prior to 1969, all revenue forecasting was
done in the Florida gover­nor's office. Consensus estimating
developed after the Florida legislature began in the 1960s to
create a nonpartisan pro­fessional staff to assist with fiscal
and other estimating issues. Starting in 1979-1980, the governor's
staff and the legislature's professional staff began to meet at
designated times of the year to reconcile their estimates.
Consensus reve­nue estimating evolved as "a custom and
practice" out of these meetings. Later, the consensus estimating
procedure was codified. Correspondence with James Zingale,
Executive Director, Florida Department of Revenue, August 29 and
Sep­tember 8, 2003. Other states, particularly Michigan, were
not far behind Florida in developing consensus estimating.
Interviews with Mark Haas, Chief Operating Officer, Michigan State
Pension Agency, August 2003, and Patricia Wood­worth, now Chief
Financial Officer, Art Institute of Chicago, September 5,
2003.

[99]Council of State
Governments, State Policy Innovations Group, "Revenue Forecasting
and Estimating in the States," reprinted in State Tax Notes,
September 28, 1992, p. 449.

[100]See Figure 2,
"State Offices Participating in Revenue Forecasting," in Council of
State Governments, "Revenue Forecasting and Estimating in the
States."

[101]Something similar
occurs at the federal level when representatives of the Office of
Management and Budget, Council of Economic Advisers, and Treasury
Department meet to agree on a baseline macroeconomic forecast for
the executive branch. But, unlike state-level consensus estimating,
representatives of the legislative branch do not participate in
these meetings. Nor is there any opportunity for public
participation in these meetings.

[103]Florida and
Michigan provide examples of this approach. For a description of
the Florida consensus estimating process, see Florida Department of
Revenue, Office of Research and Analysis, Florida Tax
Handbook, 2003, pp. 21-22, available on the Web under "Reports"
at www.myflorida.com/edr. For Michigan's approach, see
Rebecca Ross, "Consensus Revenue Esti­mating: The Process,"
Fiscal Forum, House Fiscal Agency, Lansing, Michigan, April
2001.

[104]Interview with
Christian Weiss, Chief Economist, Florida Department of Revenue,
Office of Research and Analysis, August 5, 2003.

[106]In Florida,
regularly scheduled estimating conferences are held "at least three
times a year, once in the fall to provide fore­casts for the
Governor's budget recommendations, once in the winter to provide
final estimates for the Legislature's appropriation process, and
once in the spring to adjust the winter forecast to reflect
legislative changes." In addition, "impact conferences" are held on
an as-needed basis. Florida Department of Revenue, Office of
Research and Analysis, Florida Tax Handbook, p.
21.

[107]See, for example,
the fiscal notes prepared by the Minnesota Department of Revenue,
available at www.taxes.state.mn.us/
legal_policy/revenue_analysis/revenue_analyses.shtml.

[108]CBO estimates are
available on the Web at www.cbo.gov/CESearch.htm. For a
discussion of CBO cost estimates, see the text accompanying note
69, supra.

[109]The text of the
Act can be found at
http://scaleplus.law.gov.au/html/pasteact/2/3115/top.htm. A
brief explanation of the Act appears at
www.finance.gov.au/budgetgroup/other%5Fguidance%5Fnotes/charter%5Fof%5Fbudget%5Fhonesty.html.

[110]Further
information about Canadian developments is available on the Finance
Canada Web site at www.fin.gc.ca and from the Revenue
Analysis and Forecasting Branch in the Fiscal Policy Division of
the Economic and Fiscal Policy Branch of Finance Canada.

[111]The Web site for
the Danish Finance Ministry is at www.fm.dk/. English
translations of selected documents are available.

[118]The Code of
Good Practices on Fiscal Transparency-Declaration of Principles
was adopted by the IMF Board on April 16, 1998, and was revised and
updated on March 23, 2001. It is available on the Web at
www.imf.org/external/np/fad/trans/ code.htm.

[119]The Manual on
Fiscal Transparency is available on the Web at
www.imf.org/external/np/fad/trans/manual/index.htm.

[121]Transparency
practices are tabulated in tables 7.2.h.1 through 7.2.h.5, which
appear in Part 7 of the preliminary survey results. These results
are available on the Web at
http://ocde.dyndns.org/acceuil.aspx?.

[122]For example, 18
years ago, Dr. Gerard M. Brannon, a former director of Treasury's
Office of Tax Analysis, advocated "a more open exchange of the
assumptions that underlie revenue estimates and of the models that
are used to generate these numbers." See "Revenue Estimators Play a
New Role as Numbers Dictate Policy," Tax Notes, November 24,
1986, p. 701. Sixteen years ago, on January 14-15, 1988, the
Taxation Section of the Federal Bar Association held a conference
at Air­lie, Virginia, on "The Condition of the Tax Legislative
Process." The conference summary indicates that "There was an
extensive discussion of injecting more 'sunshine' into the revenue
estimating process by making the underlying economic assumptions
more publicly available." The full text of the conference summary
is set forth in Tax Notes, June 27, 1988, starting at p.
1581.

[123]According to a
former government revenue estimator who is now in private practice,
"A major issue is the siege mentality of all the participants in
the revenue estimating process. Incremental improvements in these
attitudes will occur if greater transparency allows the public to
learn about the professionalism of the JCT and Treasury
estimators."

[127]The mandate should
speak in general terms but should also lay the groundwork for
disclosure of all 11 of the elements of generalized and specific
transparency listed in the text accompanying note 9,
supra.

[128]The proposal made
in the text might take the form of an amendment to Section 7805 of
the Internal Revenue Code, which relates to publication of rules
and regulations. The proposed amendment is not appropriately part
of Chapter 61 of the Code, which relates to "Information and
Returns." The disclosure provisions of Sections 6104 (relating to
exempt organizations), Section 6108 (relating to statistical
publications), and Section 6110 (relating to written
determinations) appear to be located in Chapter 61 because they
function as exceptions to Section 6103's general
prohibition on disclosure of tax returns and return
information. The proposal made in the text is different
from, rather than an exception to, Section 6103.

[130]A related
"mindset" problem involves the isolation of the Treasury and JCT
revenue estimators from the rest of the tax policy and economics
community. This is not a problem that can be addressed by
legislation, but it is a problem never­theless. The economists
who do revenue estimating seldom participate in the work of the
National Tax Association or the Washington-based associations for
professional tax economists. Their isolation from the rest of their
professional commu­nity weakens the connections that would
otherwise exist between the Treasury and JCT staffs, and between
revenue esti­mators and the policy-oriented economists and
lawyers working on the Treasury and JCT staffs. Too often, this
isolation translates into unhealthy "us versus them" attitudes that
do not advance the public interest.

[131]The 1990 version
of Senator Kasten's proposed legislation was introduced as S. 3243,
10lst Cong., 2nd Sess., and is avail­able on the Web at
http://thomas.loc.gov/.

[132]An article by
Senator Kasten explaining his sunshine proposal appears in the
February 1990 issue of the Tax Foundation's newsletter, Tax
Features, and is reprinted as Doc 90-1551, 90 TNT 46-30,
in Tax Notes Today, February 15, 1990.

[135]Letters dated May
18, 1995, from Kenneth J. Kies, Chief of Staff of the Joint
Committee, to Bill Archer, Chairman of the House Ways and Means
Committee, and Bob Packwood, Chairman of the Senate Finance
Committee, stated that "in response to concerns," the Joint
Committee was making eight enumerated "changes in the estimating
process." The first change was that "information regarding any
significant behavioral assumptions underlying estimates of major
tax propos­als will now be included with our estimates if
requested by the Member of Congress submitting the estimate
request." Tax Notes Today, May 18, 1995, Doc 95-5074, 95
TNT 98-25 (Archer); Doc 95-5075, 95 TNT 98-26
(Packwood).

[137]The University of
Michigan is currently engaged in a "Health and Retirement Study"
for the U.S. Department of Health and Human Services. The study
requires the use of confidential data that are released to
researchers under the provisions of a "Contract for Use of
Restricted Data." The contract requires preparation of a
"Restricted Data Protection Plan" as part of an "effort to ensure
that our promises of anonymity to our respondents are kept and that
no persons other than those authorized by the Contract-the
Restricted Data Investigator, Co-Investigators, and Research
Staff-have access to the contents of the Restricted Data." For
further information, see
http://hrsonline.isr.umich.edu/rda/rdapkg_prot.htm.

[138]Section
7213(a)(1)-(3) of the Internal Revenue Code imposes a fine of up to
$5,000 and imprisonment for up to five years, or both, for
unauthorized disclosure of tax return information. In addition,
Sections 7431 and 7435 provide civil damages for unauthorized tax
information disclosures.

[139]For example, in
1984-1985, a private contractor, Thomas Vasquez, built a
comprehensive Treasury income tax model data base that was later
used in modeling some of the provisions of the 1986 Tax
Act.

[141]A description of
the Census Bureau's Research Data Center program is available on
the Web at http://148.129.75.160/ ces.php/rdc.

[142]See, for example,
the discussion of "Restricted-Use Contractual Data" on the Web site
maintained by the National Longi­tudinal Study of Adolescent
Health, at
www.cpc.unc.edu/projects/addhealth/data/restricteduse.
Examples of security plans for the use of study data are provided
at
www.cpc.unc.edu/projects/addhealth/data/restricteduse/security2.

[143]See the Department
of Education's "Restricted-Use Data Procedures Manual," which is
available on the Web at http://
nces.ed.gov/statprog/rudman/index.asp.

[144]Information about
the Bureau of Labor Statistics program is available on the Web at
www.bls.gov/bls/blsresda.htm.

[145]An excellent
description of the Research Data Center approach has been prepared
by the Confidentiality and Data Access Committee of the Federal
Committee on Statistical Methodology (FCSM) in the Office of
Management and Budget. See "Restricted Access Procedures,"
available (following the fourth boldface bullet) on the FCSM Web
site at www.fcsm.gov/ committees/cdac/resources.html. For
information on similar centers at the University of Michigan, the
U.S. Department of Justice, the U.S. Department of Agriculture, the
U.S. Immigration and Naturalization Service, and Statistics Canada,
see "Enhancing Researchers [sic] Access to Confidentiality
Data: Five Case Studies," presented at the 2001 Joint Statistical
Meeting, which is available on the Web at
www.amstat.org/meetings/jsm/2001/index.cfm?fuseaction=activity_details&activi­tyid=237&sessionid=200619.

[146]The basic skills
needed to do cost estimates for non-tax bills are quite similar to
those needed to do tax estimates. A merger of the JCT and CBO
staffs would therefore make it easier to cope with estimating
workloads, since the CBO staff would be available to help the tax
estimators on an as-needed basis, and vice-versa.
Furthermore, the transparency stan­dards and procedures
developed by the CBO over the past 30 years would begin to apply to
tax estimates as well, and the personnel and other supporting
services now provided by the CBO to its operating divisions would
become fully avail­able to the JCT tax estimators. However, a
merger of the two estimating staffs might impede ready access by
the former JCT estimators to the important legal expertise on the
JCT staff. According to one former JCT and Treasury estimator,
"Estimators are not trained in tax law, do not keep up with rulings
and other IRS guidance, and often know little about other areas of
controversy." He concludes that "It would be very harmful to the
accuracy of the estimates if the estimating staff were to be
separated from the attorneys."

[147]See Part 4 of
Appendix 1 to Joint Committee on Taxation, Written Testimony of
the Staff of the Joint Committee on Taxation Regarding the Revenue
Estimating Process, JCX-1-95), in Tax Notes Today,
January 10, 1995, Doc 95-441, 95 TNT 7-10. That report
indicates that "Some proposals to reorganize the operations of the
Congress have proposed merging the Joint Committee on Taxation
revenue estimating staff with the Congressional Budget Office." The
Appendix then rejects those proposals because "Such a move would
seriously impair the unique relationships that permit the Joint
Committee's law­yers and economists to work
together…."

[148]For instructions
on accessing these estimates, see note 64, supra.

[149]See the discussion
of this issue in "The JCT and Congress" in the text accompanying
note 57, supra.

[150]See Office of
Management and Budget, Analytical Perspectives (Fiscal
2005), pp. 285-328, available at
http://www.white­house.gov/omb/budget/fy2005 as the
third of the listed "Budget Documents."

[151]The Treasury
Office of Tax Analysis site is located at
www.treas.gov/offices/tax-policy/offices/ota.shtml.

[152]See, for example,
the March 22, 2004, revenue and spending estimates for H.R. 3971,
the Highway Reauthorization Tax Act of 2004, which are available on
the CBO Web site at
www.cbo.gov/showdoc.cfm?index=5257&sequence=0. The CBO
dis­cussion entitled "Basis of Estimate" states that the "JCT
provided all the revenue estimates."

[153]In addition to
lack of detail, there is an unfortunate limitation on the CBO's
ability to provide additional information with respect to these
estimates. At present, the CBO's Web posting of JCT estimates
includes the names of the CBO analysts who prepared the estimate
for publication; readers are invited to consult them if questions
arise. However, if members of the public have questions about the
details of the publicly posted JCT estimate, the listed CBO
employees cannot answer them. Instead, according to the CBO, those
questions must be addressed to the JCT estimating staff, which does
not nor­mally respond to questions from the public. The end
result of this Catch 22 situation is that JCT estimates are
in some instances publicly available through the CBO, but further
information about them is not. This situation seems contrary to the
CBO's stated publication policy, which includes providing the press
and the public with "further details on request." See note 67,
supra.

[154]A useful
discussion of the purpose and function of independent peer review
is set forth in "Proposed Bulletin on Peer Review and Information
Quality," published on September 15, 2003, by the Office of
Management and Budget. See 68 Fed. Reg. 54,023 (Sept. 15, 2003) at
54,024-54,026.

[155]The Office of
Information and Regulatory Affairs (OIRA), which is part of the
Office of Management and Budget, encour­ages federal agencies
to conduct peer reviews of proposed regulatory rules. The purpose,
according to OIRA, "is to pro­vide an expert review of the use
of science that is free from the biases of the regulators and the
interested parties." See Office of Management and Budget, "Proposed
Bulletin on Peer Review and Information Quality."

[159]See Overview of
Work of the Staff of the Joint Committee on Taxation to Model the
Macroeconomic Effects of Proposed Tax Legisla­tion to Comply
with House Rule XII.3.(h)(2), JCX-105-03, December 22, 2003, in
Tax Notes Today, December 22, 2003, Doc 2003-26926, 2003
TNT 246-8.

[160]In March 2003, in
its Analysis of the President's Budgetary Proposals for Fiscal
Year 2004, the CBO published a sensitivity analysis of
alternative macroeconomic scenarios relating to the President's
budget proposal. The CBO budget report is available on the Web at
www.cbo.gov/showdoc.cfm?index=4129&sequence=0. The
sensitivity analysis of alternative scenarios is set forth in the
last section of the report.

[161]This may account
for Treasury's failure to publish a proposed National Tax
Association paper relating to the revenue esti­mates for the
President's 2003 dividend exclusion proposal. See the text
following note 20, supra. It may also account for Treasury's
long delay in responding to Tax Analysts' Freedom of Information
Act request for access to the assumptions and spreadsheets
underlying that proposal. See note 22, supra.

[164]See the discussion
of disclosure-proofing the public-use file in the text following
note 90, supra.

[165]However, Treasury
sources indicate that there are "still issues that need to be
resolved" to disclosure-proof the public-use file and that delays
in release of the file "aren't just foot dragging." If so, the IRS
should state what the issues are and address them. Merely delaying
publication of data until they are no longer useful is not an
acceptable solution.

[166]As indicated in
note 90, supra, statistics of income data become available
about six months after the close of the filing period for a given
taxable year.

[172]Greater
transparency, in itself, would encourage competition by making
information available to individuals and firms that are in a
position to compete. Enhanced transparency would also enable both
public and private revenue estimators to compete more intelligently
because they would know more about why their estimates differ. For
example, they would know whether their differences arose from
disparate assumptions (in which case the assumptions could be
scrutinized) or from methodological differences (in which case the
relative merits of competing models could be debated). The net
result would be intelligently focused pressure for improvements in
the revenue-estimating process, leading to sounder assump­tions
and better models.

[173]This is not a new
suggestion. The same idea was advanced 18 years ago by Jack Teuber
in Tax Notes. See "The Suspicion That Results from the
Revenue Estimators' Evolving Role Is Not Easily Overcome," Tax
Notes, December 8, 1986, p. 882.

[179]The revenue and
distributional analyses provided by the Urban-Brookings Tax Policy
Center in 2003-2004 with respect to tax proposals illustrate how
private analyses can inform and enrich the public debate. These
estimates are available at
http://taxpolicycenter.org/TaxModel/tmdb/tmtemplate.cfm.

[180]Private firms
have made a substantial amount of money doing revenue estimating
for private clients. Nonprofit organiza­tions could do the
same. As nonprofits, they must of course create and enforce strict
rules to assure the integrity and independence of their estimating
activities. A requirement that all their estimates be published in
full after peer review might be among those rules. To keep the
playing field level with that of other private firms, earnings from
nonprofit rev­enue estimating should be subject to unrelated
business income tax (UBIT).

[181]See the
discussion of congressional calls for greater revenue-estimating
transparency in the text accompanying notes 131 and 133,
supra.